Markets

European stock markets failed to build on yesterday’s US momentum. They currently shed around 0.7% and re-approach the intraday lows. The European banking sector (-2%) in amongst the underperformers with the German Bundesbank warning in its Financial Stability Review that the effects of the real economic crisis have not yet fully arrived in the German financial system. Company solvency issues loom around the corner with the Bundesbank plotting a 35% rise by Q1 2021 in insolvencies. In this respect, its interesting and probably coincidental the European Commission in a statement announced to extend looser subsidy rules from governments to companies until June 2021. Countries can now also cover operating losses from firms with a >30% revenue decline due to the COVID-19 pandemic. Apart from the Bundesbank warning, European risk sentiment was further hit by tougher (expected) lockdown measures in the Netherlands and France. The WHO said that global corona-cases set a new weekly record with India on track to overtake the US as country with the highest cumulative number of infections. The forward looking expectations component of the German ZEW investor confidence index showed an unexpected setback in October (56.1 from 77.4 vs 72 expected; a 5-month low). ZEW-president Wambach obviously pointed to greater uncertainly about the outlook because of the 2nd COVID-19 wave. US eco data included September CPI inflation in line with forecasts (0.2% M/M & 1.4% Y/Y for core) and a better than expected NFIB Small Business Optimism (104 from 100.2). The data didn’t impact trading. Core bonds had a fruitful session in today’s environment with US Treasuries outperforming in a catch-up move after yesterday’s Columbus Day close. The US yield curve bull flattens with yields shedding 1 bp to 4 bps. The US 10-yr yield’s intense test of the 0.8% resistance now seems to be over. German yields lose around 0.5 bps across the curve. The German 10-yr yield remains near -0.54%/-0.56% support. 10-yr yield spreads vs Germany are hardly changed with Greece (-3 bps) outperforming. The Italian Treasury today launched its first 3-yr BTP with a 0% coupon attached, raising €3.75bn. The dollar slightly took the upper hand on FX markets and is even getting into better shape as risk sentiment deteriorates further at the US opening bell. The trade-weighted greenback (DXY) rises to 93.35. EUR/USD changes hands at 1.1765, falling through the downside of a narrow upwardly sloping channel since the end of September. Even USD/JPY rises slightly to 105.60. EUR/GBP increases from 0.9040 to 0.9070. Markets ignored a disappointing UK labour market report, but shivered on headlines that EU leaders later this week will start contingency planning in case of collapsed brexit trade talks.

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Argentina is widely expected to devaluate its currency for the seventh time in 20 years maybe as soon as November amid faltering confidence in the government’s ability to stabilize the economy. Its economy was already ailing even before the pandemic struck. The central bank is limiting the Argentine peso’s monthly decline to 2-3% with heavy FX interventions but reserves are running out. Ever tighter capital controls would probably only postpone the inevitable.

JPMorgan kicked off the earnings season on a positive note, posting a surprise jump in profit as trading results delivered a 30% revenue gain amid elevated lending. Loan-loss provisions were unexpectedly cut, adding to the bottom line. Competitor Citi results were similar; beating estimates for trading revenue while provisions for loan losses rose less than expected.

Growth in 2020 is foreseen to shrink 4.4% vs. 5.2% seen in June, followed by a 5.2% rebound in 2021 vs. 5.4%, new IMF projections showed today. The economic recovery risks being uneven though, the IMF added, as the upward revision reflects in particular better-than-expected growth in the US (-4.3% in 2020 vs. -8% previously), EMU (-8.3% vs. -10.2%) and China. The outlook for emerging markets worsened from a 3.1% contraction to 3.3% this year. The Washington-based institute ‘s forecasts assume current monetary policy settings through 2025.

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