A rather muted European session evolved into much more interesting American dealings yesterday. US equities jumped more than 2% (Nasdaq). The S&P500 nears first resistance near the 3400 area. A perfect storm hit core bonds hard. First, US president Trump announced he’s allowed to already leave the military hospital, suggesting concerns over his health (and the coronavirus) are overdone. Second, markets continue to believe that Democrats and Republicans in some way or another will overcome the $600bn gap in fiscal stimulus proposals since Speaker of the House Pelosi said last week that Trump’s illness “changed the dynamics” of the talks. Pelosi and USTS Mnuchin keep talking over the phone since they met last week. Other factors pushing yields higher was an unexpected rise of the ISM non-manufacturing confidence (57.8 vs. 56.2) and Biden extending his lead in the polls, easing market fears that Trump could contest the election outcome if it were a close call. Lastly, we see the upcoming US supply (3y, 10y and 30y) as a final element that helped US yields 1.6 bps (2-yr) to 10.2 bps (30-yr) higher. The increase came both on the account of inflation expectations as real yields – suggesting fiscal stimulus hopes are filtering through in rates markets. German yields rose about 2.5 bps at the long end of the curve. The dollar fainted amid the broad risk-on even as US real yields rose. Some of the elements underpinning the risk rally (fiscal stimulus pushing the debt deficit ever higher) dominated over the greenback. EUR/USD went for a test of intermediate resistance at 1.18 but eventually closed below (1.1783, up from 1.1716). USD/JPY finished at the highest level in almost three weeks (105.75). EUR/JPY left behind 124 convincingly (124.6). Sterling wasn’t able to bank on the constructive risk sentiment. The British currency holds its breath as crunch Brexit negotiations take place. EUR/GBP recovered from Friday’s blow, closing at 0.908.
Asian equities follow Wall Street’s performance though gains are less impressive (ranging from 0.3-1.1%). News flow is limited to the Australian central bank keeping rates steady but considering more easing in the future (see below). The Aussie dollar erased an initial spike quickly to trade lower near AUD/USD 0.717. The focus turns to the US 3y auction later tonight (USD52bn). We don’t expect any major issues given the current risk environment and the recent rise in yields. Fed and ECB President Powell and Lagarde’s speeches later today are worth noting as well. All in all, we think decent risk appetite will dominate trading again today. Yesterday’s yield moves were strong. The 10-yr is trading near the upper bound of the sideways trading range and is currently trading a knee-jerk tad lower. We don’t expect the move to go far given that the improved short-term picture in other long tenors, including the 30-yr yield (piercing through the downward trending line connecting the March-June-August highs). Yesterday’s blow to the dollar called off its comeback. The greenback could remain in the defensive from a technical point of view. The EUR/USD 1.18 area is a first reference. Sterling’s upside remains limited in our view as long there are no signals of a breakthrough in the fisheries and state aid deadlock.
The Irish central bank published its Q4 quarterly bulletin. In its updated forecasts, the central bank switched an assumption on the future trade relationship between the EU and the UK. It now believes that both parties would move to trading on WTO terms from 1 January 2021. Such sudden and disruptive move is projected to result in the frontloading of associated output and employment losses, subtracting around 2 percentage points from GDP growth in 2021 (+3.4% forecast) and a further 0.3 percentage points in 2022 (+4.7% forecast).
The Reserve Bank of Australia decided to maintain the current policy setting including the 0.25% cash rate, the 0.25% target for the 3-yr Austrian government bond yield and the parameters for the expanded Term Funding Facility. The central bank views addressing the high rate of unemployment as an important national priority and continues to consider how additional monetary easing could support jobs as the economy opens up further.