The shocker effect from Trump shelving fiscal stimulus talks yesterday evening already dissipated today. An overnight follow-up tweet from the US president suggesting he would still sign smaller, individual stimulus bills comforted markets. Most Asian markets even finished in green. Europe started off in positive territory but is trading marginally in the red at the time of writing. Market moves are in any case nowhere near as sudden and harsh as on WS yesterday. US equities open with gains of 1% and higher. ECB president Lagarde warned against premature withdrawal of stimulus in a speech but her comments weren’t new and went unnoticed. Both US Treasury and Bund futures instead (more than) erase Tuesday’s last-minute spike higher. USTs underperform in the run-up to tonight’s 10y auction ($35 bn). The US yield curve bear steepens with yield changes varying from +2.5 bps (5-yr) over to 4.8 bps (30-yr). Speeches by Fed’s Rosengren on the economy and especially vice-president Williams on average inflation targeting later tonight are worth keeping an eye on. They could exert some influence over US yields. German yields add about 1.6 bps (10-yr) to 1.9 bps (30-yr). They temporarily pared all gains after some remarkable quotes from Bundesbank president and known monetary hawk Weidmann. The German made clear that any decision on increasing PEPP hasn’t been taken yet. He did say however that further rate cuts to interest rates are still possible, citing the reversal rate – where costs of an even lower rate trump benefits – hasn’t been reached yet. Peripheral spreads tighten to core with Greece (-4 bps) outperforming peers.
EUR/USD had a strong morning session, jumping from the 1.173 area to 1.175/6 before taking a lunch break around noon. A second upleg stretched until the timing of ECB’s Lagarde’s speech. The currency pair then topped out at around 1.177 currently. USD/JPY temporarily ventured north of 106 but ran out of steam once it hit resistance near the upper bound of the downward trend channel (today around 106.11). Hovering around 105.95, USD/JPY has still recouped much of the September losses though. Sterling had an off-day, to say the least. Ireland’s Coveney sounded downbeat on Brexit and said EU negotiator won’t engage in tunnel talks without the UK moving on its state aid position. The foreign minister added that the gap on fishing is still “really really wide”. A second blow to sterling came from a person close to the negotiations making clear that the UK will quit talks if it isn’t clear that a deal is possible by the end of next week. That’s nothing new but frightened investors nevertheless because the EU called that bluff yesterday, threatening to drag talks into November and betting that Johnson won’t pull the plug on talks. The poker game is on, ladies and gentlemen. EUR/GBP jumped from an intraday low at 0.91 to 0.914.
The Polish central bank kept its policy rate unchanged at 0.1%. NBP-governor Glapinski addresses the press later today. Two governors last week called for policy normalization in 2021 to battle rising inflation. Core and headline Polish CPI respectively reached 4% Y/Y and 3.2% Y/Y in September. Both believe that the credibility of the zloty is at risk without policy action. EUR/PLN tested 4.60 resistance at the end of September, before returning below 4.50 on the normalization comments.
Spanish PM Sanchez put forward a €72bn stimulus plan for the next 3 years which should bolster GDP by an additional 2.5%. The support will be frontloaded in the 2020 budget. The bulk of the money will be drawn from the European recovery fund (80%). He hopes that his plan will boost employment by 800 000 by the end of 2023. The Spanish central bank forecasts a 12.6% hit to GDP, resulting in an unemployment rate near 20% over the projection horizon.