Investors’ mood turned more balanced. Headlines stories didn’t provided enough positive news to continue yesterday’s rally. The debate on US fiscal stimulus continues as the Democratic Party prepared a new proposal, but it remains highly uncertain whether a deal is possible as the US election fever is rising. European equities show limited losses of less than 0.5%. US markets open little changed. EMU data were mixed. EC economic confidence rebounded more than expected from 87.5 to 91.1, but isn’t able to remove uncertainty on the fall-out from the recent rise in corona infections and its impact on Q4 growth. German HICP inflation unexpectedly declined by -0.4% M/M to be 0.4% lower on a yearly basis (-0.1% Y/Y was expected). Spanish inflation also printed lower than expected at -0.6% Y/Y. The data don’t change the ECB’s scenario in a profound way. Still, they support the case of the doves as the debate on more stimulus continues. The impact on European bonds was limited. German yields decline between 0.2 bp (2-y) and 1.5 bp (30-y). The Bund future (174.75) is coming ever closer to the 175 resistance area. Italy successfully sold the top planned amount of € 8.25 bln over three tranches. 10-y intra-EMU spreads versus Germany narrowed marginally (Italy -2 bp). US yields are little changed as investors are pondering the potential impact of US presidential election campaign with Donald Trump and Joe Biden holding their first debate this evening. Will the election finally become a driver for US markets and/or global trading?

Trading in the major USD cross rates showed no consistent pattern. Yesterday, the dollar ceded ground in a global risk-on context. Today, the US currency kept a tentative negative bias even as sentiment turned more cautions. Interestingly, EUR/USD tries to regain the 1.1696 previous support despite low (Spanish and German) inflation. The move probably was supported by a better bid for EUR/JPY (123.60 area) and USD/JPY (106.60 area) through the cross rates. Sterling today wasn’t able to build on yesterday’s optimism of a Brexit deal. Uncertainty on Brexit, on the economy and on additional BoE stimulus remains high. EUR/GBP is gain changing hands north of 0.91.

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The Ruble and the Turkish lira which suffered from rising geopolitical and military tensions in Azerbaijan and Armenia remained under pressure, even as selling eased a bit throughout the day. The Turkish Lira touched another all time low against the euro (EUR/TRY high 9.17 area). EUR/RUB also touched a multi-year low north of 93. Aside from geopolitics markets look out for (additional) measures from the central banks. The central bank of Russia announced that it will sell $ 2 bln FX reserves over the next three months. While potentially supportive for the currency, the Bank indicated that it doesn’t consider it as forex interventions. The picture CE currencies is mixed. The Czech korona and Hungarian forint are struggling to rebound off recent lows. The zloty showed remarkable outperformance, with EUR/PLN declining from the 4.59 area to the 4.53 area. CB policy Member Gatnar  said that high inflation is a signal that ultra-low interest rates can hurt the economy. He advocates policy normalization in 2021.

News Headlines

The South-African unemployment rate unexpectedly declined from 30.1% in Q1 to 23.3% in Q2. However, details show a less rosy picture. The labour force participation rate (employed + unemployed as a percentage of the population) declined from 60.3% to 47.3% with the employed/population ratio down to a mere 36.3%. The total amount of employed South Africans dropped from 16.4 million to 14.1 million. South-Africa is looking against a double digit GDP decline this year (-11.5% of GDP), having suffered two recessions in two years even before COVID-19 hit. The South-African rand nevertheless profits today with USD/ZAR back below 17.

The Spanish cabinet approved a broad social protection package today, including amongst others the extension until January of the ERTE furlough scheme (set to expire tomorrow) and a prolongation of the ban on evicting vulnerable tenants. Around 800 000 employees remain in ERTE down from 3.4 million in the spring. However, the number is rising again as low season approaches and as Covid-19 infections prompt tougher measures.


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