Markets
Yesterday was more of the same really with the few data available being overshadowed by risk sentiment. Jobless claims disappointed and illustrated the ongoing arduously labor market recovery but didn’t really bother markets. Investors rather focused on Trump saying a bigger relief deal is still being discussed just days after his tweet in which he said those talks would be tilted over the November elections. Stocks shined with Europe and Wall Street eking out gains of 0.5% to more than 1%. The S&P500 cleared first resistance. Oil prices continued their impressive rebound that started after dipping below $40 (Brent). Hurricane Delta forces Gulf of Mexico oil producers to shut more than 90% of output. Nevertheless, core bonds gained ground with the German Bund outperforming. The German curve bull flattened with yields down 3 to 3.6 bps at the long end (10 and 30-yr). US yields barely budged, losing less than 1 bp across the curve. The 30-yr auction went a little less smooth compared to the previous bond sales this week. The dollar decline halted yesterday. EUR/USD quickly erased early gains (briefly hit 1.178) in volatile technical trading to finish marginally lower nearby 1.176. USD/JPY went nowhere near the 106 pivot. Wild Brexit related swings in sterling are the new normal. EUR/GBP slingshot around 0.91 but closed eventually below.
Asian equity markets are trading mixed. Japan declines. India advances about 0.5% after the RBI left rates unchanged (see below). China opens well in the green (2%+) after a week-long close (Golden Week). The yuan soars to the strongest level since April 2019 (USD/CNY 6.71) after a stronger-than-expected fixing by the PBOC. China’s Caixin services PMI (54.8 vs. 54.3 expected) also supports Chinese assets this morning (see below). The dollar in general trades weaker. The kiwi dollar tops the G10 scoreboard, capping NZD/USD 0.66. EUR/USD touched 1.178 for a third day straight but fails to push through. Rising core bonds once again defy risk sentiment.
In terms of economic data, there is little planned for release today. Equity futures suggest a green opening. We expect the constructive sentiment to hold after president Trump changed tack on a larger stimulus bill. Interestingly, the net-steepening of the US curve over the recent days/weeks mainly occurs on the back of rising inflation expectations. Even this morning’s decline in yields is solely the result of a fall in real yields (-2 bps). Along with resilient equity markets, that helps explain the dollar underperformance. We assume EUR/USD to hold its current upward bias. The couple should really take out 1.178 though, which proved a tough nut to crack in recent days, for the uptrend to be sustained. Data from the British industrial sector is interesting but will probably be of insignificance for sterling with the (unacknowledged) October 15 deadline ever coming closer. EUR/GBP is caught up in a narrowing triangle pattern with a risk of a break-out.
News Headlines
The Reserve Bank of India left its benchmark repurchase rate unchanged at 4%, as widely expected. The Monetary Policy Committee expects its accommodative stance to remain in place at least through the current financial year and into next year to revive growth. The RBI sees GDP contracting 9.5% in fiscal year 2021. However, above target inflation currently prevents the bank from easing policy further. The RBI expects inflation (6.69 in August) to return to 4%, the middle of its 2%-6% target range in the quarter ending March.
The China Caixin services PMI for September rose from 54.0 to 54.8 while a more modest rise was expected. The rise was mainly driven by better domestic demand for services. Export orders remain in contraction territory. The report also indicated hiring to increase for the second consecutive month. The Caixin Composite PMI eased to 54.5 from 55.1.
