The spark which ignited US stock markets to a 1.5%-2.5% rally survived the weekend and triggers similar gains in Europe today. It’s hard to pin a specific trigger to stocks’ rally. If any, it proves that stock market sentiment remains very strong after the 10%+ correction off the highs early September. Underlying worries remain though: the bar for additional monetary and/or fiscal stimulus to counter the new upswing in Covid-19 infections is very high. Sterling strength suggests that Europe’s optimism is at least partially related to this week’s brexit negotiations between the EU and UK. The self-imposed deadline of the October 15 EU-Summit looms with both parties still at loggerheads over EU fishing rights and keeping a level playing field. EU Barnier and UK Frost hope to settle the biggest differences in order for “tunnel” negotiations on those key topics to commence. We acknowledge the sudden improvement in sentiment towards brexit, but if the past 4 years have learnt us anything than it is to be very careful in embracing “early” optimism. Expect volatility to be part of the daily trading life in the run-up to mid-October. Sterling excels on FX markets today with EUR/GBP giving away first intermediate support at EUR/GBP 0.9083. BoE Ramsden offers some counterweight in the discussion on the possible implementation of negative interest rates. He thinks of the current 0.1% as the effective lower bound.
Today’s positive risk environment benefited other assets as well, starting with the single currency. EUR/USD last week lost 1.1696 support, closing the week at 1.1631. The currency pair changes hands around 1.1675 currently. Interestingly: the CEE currencies can’t find relive after being smashed in last week’s volatile market circumstances. Other less liquid currencies are better off with stand-out performances from the Scandinavian twins NOK and SEK. The Russian ruble and Turkish lira hang in the ropes as intense fighting on the Armenia-Azerbaijan conflict over disputed land continued. Russia has a mutual-defense pact with Armenia while Turkey has close (military links) with Azerbaijan. Apart from risk sentiment, we expect trading later this week to center around the US side of the story with the first Biden-Trump presidential debate and the high level monthly eco releases culminating in Friday’s payrolls report. Core bonds cede some ground, but moves are again technically insignificant. US yields add up to 0.8 bps (30-yr) on a daily basis. Changes on the German yield curve vary between flat and +1 bp.
France aims to spend some €42bn of its €100bn stimulus plan announced earlier this year already by the end of 2021. It will issue bonds totaling €260bn in 2021 to fund a.o. the additional expenditures. That is the same amount as this year. The government expects the budget deficit at 10.2% in 2020 and 6.7% in 2021 while growth will fall an estimated 10% this year and rise 8% in the next.
Hungary and Poland will create a joint institute to assess the state of rule of law across the EU. The EC accused both countries multiple times of undermining democracy. The duo denies doing so, adding that those accusations are political rather than well-founded. Also today, a document seen by Reuters revealed Germany proposing a rule of law conditionality for accessing European funds, including the €750 bn rescue fund. Those breaching the law could see access to the funds blocked with a simple majority vote.
The number of coronavirus infections continues to rise across Europe, with a near-record tally in the Netherlands today. Local and municipal health authorities are gathering this afternoon to discuss possible new regional measures including wearing masks and closing bars early. PM Rutte is scheduled to address the country later today.