There wasn’t much to guide trading, leaving a fragile sentiment at the steering wheel. Mixed corporate earnings couldn’t help clear the sky either. Risky assets had been thriving over the past few days and weeks as ongoing talks between the US Democrats and Republicans kept hopes for stimulus alive, even though there wasn’t much progress to be reported. A pause in the risk rally was thus long overdue, especially in US equities. While Europe already struggled on Monday, Wall Street only started correcting (modestly) lower yesterday. Short-term profit-taking then rolled over into Asian and European dealings today. EMU stocks traded early morning losses briefly for gains but the move lacks strong legs. European stock markets mostly trade flat going into the start of the US session. WS opens with small gains. Core bonds gained ground with the Bund outperforming US Treasuries. Both trade off intraday highs however. German yields shed 1.8 bps (5-yr) to 3.4 bps (30-yr). Germany’s 10y yield breached below the -0.54/56% support. Support near -0.6% is crucial to prevent yields from declining towards -0.7% (March gap) or lower (-0.90%, March low). The US yield curve bull flattened with yields declining 1 bps (10-yr) to 1.4 bps (30-yr). The 30-yr yield tested support at the downward sloping trendline connecting the March-June-September highs.
Dollar trading was confined to very narrow ranges. EUR/USD slipped further after giving up 1.18 yesterday but since the dollar sentiment isn’t very bullish either lately, that move didn’t go very far. EUR/USD touched an intraday low near 1.172 before reversing course to trade at around 1.176 at the time of writing. That’s up from 1.174 this morning. The trade-weighted DXY slightly loses (93.34). Today’s FX outperformer was sterling. Yet, sterling initially extended yesterday’s decline as markets nervously await the start of the EU summit, which coincides with UK PM Johnson’s self-imposed deadline on October 15. Johnson repeatedly said he would then decide whether to end negotiations or not, depending on the prospects of a trade deal. EUR/GBP surpassed 0.91 again before staging a sudden drop. A person close to the Brexit talks downplayed the PM’s bluff, saying the UK won’t walk away immediately and would instead continue efforts to reach an agreement while the two-day EU summit is taking place. Although probably only short-term, his comments eased markets’ concerns that a collapse in talks now would probably lead to a no-deal Brexit by the end of the year. EUR/GBP is currently trading near 0.902, down from 0.908 and is thereby testing first support around 0.9035 (38.2% retracement 2020 low-high). Cable rebounded intraday from 1.286 to north of 1.30.
Polish MPC member Rafal Sura aligned with governor Glapinski’s view that monetary policy parameters are well calibrated right now. If necessary, he sees scope to ramp up unorthodox moves (asset purchases). He doesn’t want the central bank to give the impression that they want to tighten monetary policy. Two other NBP-members earlier this month spoke out in favour of such action because of rising inflation. Sura believes that the inflation pick-up is a one-off with prices pressure returning to the 2.5% inflation target. His comments pushed EUR/PLN back above the 4.5 mark.
US financial earnings were mixed with strong Goldman Sachs results in the balance with disappointing outcomes from Bank of America and Wells Fargo. Q3 trading revenue at Goldman was very impressive, in line with JP Morgan and Citi yesterday. It was one of the parts were BofA underperformed, while Wells’ focus is on retail banking. The latter’s higher than forecast expenses (customer remediation & restructuring charges) weighed on results. Loan loss provisions at all banks were less than forecast after taking the biggest hits in Q1 and especially Q2. Payment deferrals suggest that some of the Covid fall-out is still to come though.