Markets
Once again US dealings turned out to be the exciting part of the trading day yesterday. EMU equities started the day on soft footing, even as Wall Street finished substantially higher the day before. However, losses gradually swapped for gains of about 0.4% with the positive momentum picking up the pace at the start of US dealings. Enter Trump. The president had a call with USTS Mnuchin and others involved in the fiscal stimulus talks. They sounded skeptical about the relieve package and about House Speaker Pelosi’s real intensions, prompting Trump to calling of negotiations with the Democrats until after the elections. His comments came just hours after Powell repeated for the umpteenth time that more fiscal support is needed or risk a weak recovery. The Fed chair added that “the risks of overdoing it [fiscal aid] seem, for now, to be smaller”. US stocks fell off a cliff intraday to end 1.5% lower eventually. Core bonds initially traded near Monday’s lows but surged in the wake of Trump’s tweet. US yields erased about half of Monday’s gains and fell more than 5 bps at the long end of the curve. The US 30y remained above the downward trendline but fell below support near 1.57%. German yields were unchanged since the news came after the European close. The dollar strengthened. EUR/USD shelved attempts to take out 1.18 to fell towards 1.173. Moves in USD/JPY were fairly limited. The pair closed at 105.63. Sterling had another wild ride. EUR/GBP closed beyond 0.91(1) after the EU is said to be ready to allow Brexit talks to drag into November, beyond PM Johnson’s self-imposed deadline of October 15. That means more uncertainty for longer.
Asian stock markets shrugged off most of this morning’s opening losses. Australia outperforms (+1.25%). Calm returned after president Trump said he’s willing to ask Congress’ approval for some individual stimulus measures even though talks about a larger, comprehensive package are now all but dead. Core bonds trade well off intraday highs. European equity markets have erased most of the knee-jerk losses. The dollar forfeited early Asian gains to trade slightly weaker against most peers except the Japanese yen (USD/JPY at 105.75). EUR/USD trades around 1.174. Today’s economic calendar eyes thin. There’s a slew of ECB and Fed speeches but we doubt they’ll reveal anything new. The same goes for the Fed’s minutes of the September meeting. A 3-year US auction yesterday was solid, boding well for tonight’s 10y. Still, it could cause some UST underperformance. Risk sentiment remains key for trading though. Trump’s follow-up tweet on fiscal aid sooths markets fear at least in the short run. We think that further profit-taking in risky assets, if any, is going to be rather limited. In this respect, it won’t be easy for the USD to extend yesterday’s gains and push EUR/USD near first support near 1.17. The EU calling PM Johnson’s bluff obviously doesn’t support sterling. EUR/GBP hovers near 0.91. We don’t expect a pound comeback to occur anytime soon.
News Headlines
IMF Managing Director Georgieva said that the global economy currently is in less dire straits than it was back in June, but the calamaity is far from over. All countries are now facing a long ascent. She calls on governments not to end fiscal and monetary support or risk an economic crash in a curtainraiser speech ahead of next week’s annual IMF and World Bank meetings.
Rating agency S&P warned that corporate default rates in the US and Europe will double over the next 9 months because of the COVID-19 shock. They predict US default rates will rise from 6.2% to 12.5% and European ones from 3.8% to 8.5%. 37% of the companies rated by S&P are at risk of a rating cut and the recent record pace of downgrading isn’t slowing yet.
