All parts fell in place for an exciting risk-on repositioning yesterday, in particular on US markets. Comforting news from the political scene/on the organization of the elections, ongoing hope for additional fiscal stimulus and solid eco data all supported investors mood. Aside from solid stock markets gains, it also caused an impressive bear steepening of the US yield curve with the 10 and 30-y yields nearing first important resistance levels. For today, it was on the cards that yesterday’s positive set-up would be difficult to copy. There were was no high profile news on president Trump’s health and few important US data. Even so, after a hesitant start, European equities extended yesterday’s rebound (currently gains of 0.5% to 1.5%). US equities opened little changed but this might still be considered as resilient price action. Part of yesterday’s rise in US yields occurred after the close the European markets. In addition, German August factory orders, published at the start of the trading in Europe printed strongly. (4.5% M/M vs 2.8% expected and an upward revision of previous month). So, there was room for a catching up move of European/German yields. It didn’t occur. Bunds continue to trade resilient. Yields hardly changed in a daily perspective. In an interview released today ECB president Lagarde warned that the news rise in corona infections could complicate the hoped for V-shaped recovery. Ongoing soft ECB talk probably helps to cap a more outspoken rise in EMU yields. The US yields also take a breather after yesterday’s rise. US yields decline less than 1 bp. 10 and 30 year US yields are still testing key resistance respectively at 0.80% and 1.58%. Later today, markets keep an eye at a speech of Fed Chair Powell. The US Treasury will also start its refinancing operation with a $52 bln 3-y auction. However, the sale of 10-y (tomorrow) and 30-y (Thursday) bonds will be more important for potential moves in the US yield curve. In the intra-EMU bond markets, 10-y spreads versus Germany continue to profit from the global risk-on with Spain (-4 bp) and Portugal (-3 bp) outperforming.
On FX markets, the dollar still fails to profit from rising interest rate support. The trade-weighted dollar (DXY 93.40) hovers near the weakest level in two weeks. USD/JPY slightly outperforms (105.70 area). At the same time, EUR/USD extends its gradual rebound, revisiting the 1.18 big figure. Sterling trading faced some conflicting signals. Rumours from the EU-UK Brexit talks indicated that Europe doesn’t want to give in to PM Johnson’s deadline aiming to reach deal by 15 October, prolonging the period of (political) uncertainty. On the other hand, the UK construction PMI printed at a solid 56.8. EUR/GBP (temporarily?) spiked north of 0.91. CE currencies (HUF, PLN CZK) today also further profited from a constructive risk sentiment. This time, the Czech krone which underperformed the region of late, also regained most ground (EUR/CZK 27 area).
In its freshly released fiscal plan, Australia ramps up spending to keep the economic recovery going. Measures include bringing forward an income tax cut, A$14bn in new and accelerated infrastructure projects and a cash bonus for hiring young(er) employees. The budget deficit will rise to 11% of GDP (A$ 213.7bn) in the fiscal year through June 2021, that’s a level unseen in peacetime. Debt to GDP is expected to rise from 24.8% last fiscal year to 43.8% in 2024.
The coronavirus resurgence and resulting harsher measures to contain it in Spain might push the country to an even deeper crisis than the central bank’s worst-case scenario (growth -12.6% in 2020), Bank of Spain governor de Cos warned today. Speaking also as ECB governor, De Cos said the ECB may have to calibrate (extend or increase) its crisis measures and even introduce new ones.