Market movers today
Today the delayed EU summit kicks off in Brussels. High on the agenda will be discussions on the rule of law mechanism in the recovery fund package, which has led to increasing tensions between the European Parliament and the EU Council lately and might even delay the implementation of the package. Growing tension with Turkey will also be on the agenda.
In the US, focus reverts to the PCE core figures for August and ISM manufacturing for September. Private spending data for August will also be of interest, after the weak retail sales print.
In Scandinavia, Swedish and Norwegian September manufacturing PMIs are due for release. The Riksbank minutes could give some clues about QE going forward.
The 60 second overview
US politics. The prospects of the new fiscal stimulus package were cast in doubt by Senate leader Republican Mitch McConnell. Initially, Treasury Secretary Mnuchin had sounded optimistic about reaching a deal with Nancy Pelosi, but McConnell said that the two sides were still too far apart. The comments from McConnell had an immediate impact on the positive sentiment in the US equity market as most of the gains made on Wednesday were erased by the end of the day.
It is difficult to see a sustained rally in the US equity market or rates moving higher before we get a deal on a new fiscal relief package approved by Republicans and Democrats alike. Furthermore, the presidential debate did not provide a clear picture for US politics, which adds to the uncertainty. The need for fiscal relief has become very visible as large US corporations such as Disney and US airline companies are beginning to lay off workers on a large scale. Here the monetary stimulus from the Federal Reserve is not enough. One bright spot for the US economy has been the US housing market. The most recent data from the US housing market such as pending home sales rose more than expected as low mortgage rates are supporting the rally in the US housing market.
Hence, there is no need for a rise in US rates unless it is accompanied by strong growth and lower unemployment.
We are seeing a similar effect in Europe, where there is a risk of a rise in insolvencies among German companies, as the German government’s debt moratorium is ending. This has helped companies to avoid insolvencies. This shows the need for ongoing fiscal support in Euroland as well as monetary stimulus that keeps interest rates low.
Equities. We have seen a modest rise in Asian equity markets this morning. The Tankan report from Japan showed a modestly positive picture of the Japanese economy, but more fiscal stimulus is needed as indicated by the Japanese government.
FI. Yesterday, rates markets traded mostly sideways until the US open. The positive risk sentiment in the US drove US yields higher, followed by European yields. Late in the trading session US Treasury yields began to decline modestly on the back of the change in the sentiment in the equity market. Intra euro area spreads ended broadly unchanged. We expect the range trading to continue with 10Y German government bond yield trading in the -60bp to -40bp interval.
FX. EUR/USD stuck in the mid-1.17s while Scandies rallied late Wednesday afternoon together with GBP. More broadly commodity currencies have gone bid again in recent days as risk sentiment has showed signs of stabilisation and as China strength has moved to the fore.
Credit. iTraxx Xover ended around 3bp tighter and Main 1bp tighter, thus taking the indices to 346 and 59, respectively.
Nordic macro and markets
In Denmark, the payment of the holiday revenue has now reached some DKK20bn and we expect the number to rise further as more people apply.
In Norway, the manufacturing PMI has yet to start pointing to growth in activity. Hard data have begun to climb, however, which would suggest that the PMI has been putting out false signals in the wake of the coronavirus shock. This may be because respondents are comparing with a ‘normal’ situation rather than the previous month. Either way, the PMI is lower than normal and we should see it headed back above 50 in September.