Market movers today
The EU summit kicks off today and focus will be on Brexit. The progress in trade talks is still not sufficient to seal a new trade deal, but we do not believe in the UK’s threat to stop negotiating after the EU summit. Yesterday, we also got signals that the UK will not walk away from the table immediately.
In the US, Empire and Philly Fed indices are always interesting, as they give a first indicator of what to expect of ISM manufacturing for October. We expect that jobless claims have continued to move lower.
The 60 second overview
Bank earnings. Several of the largest US banks have now reported earnings for Q3 and the results are generally beating analysts’ estimates with profits especially being driven higher by lower than expected loan loss provisions as well as high levels of trading income. However, even so, banking stock has generally flat-lined during the past month and remains one of the worst performing sectors year-to-date in the S&P500. This is not too surprising given the volatile earnings component being trading income and the still fragile economic outlook on the back of the second-wave lockdowns currently seen in combination with the inability of the US congress to pass further stimuli and payment protection schemes. Furthermore, several banks noted that their net interest income is under pressure due to low interest rates as well as a low demand for loan balances from corporates.
Virus. New COVID-19 cases remain on the up in Europe. Thus, 700,000 new cases were reported last week, which is the largest weekly increase since the pandemic took hold. This leaves governments with a tough balancing act, namely to keep economies going while at the same time limiting the amount of new infections. In both France and Germany economists have warned that despite the lockdowns generally being less radical than was the case in March and April, new measures could tip the economies back into low growth or even recessionary terrain for Q4.
Brexit. EU summit starts today where the main topic at hand will be Brexit negotiations and specifically under what terms the two blocs will trade after the hard Brexit deadline of 31 December. The stakes are seemingly high as Boris Johnson has previously stated that the UK will prepare for a ‘no deal’ and pull out of any further trade talks in case no deal is reached at this summit, while the EU’s deadline is set at the end of this month. Ahead of the summit there is little to suggest that a deal will in fact be reached in the coming days with fishing among other things remaining an outstanding issue. However, we suspect that a deal will be reached in November and that a ‘no deal’ scenario should be of little concern in the very near term. For more on expectations ahead of the coming days’ summit see Not-so-crucial EU summit, 13 October.
FI. European yields continue to decline and the 10Y German government bond yield is close to the lower end of our expected trading range of -0.6% to -0.4%. We still think that the -60bp will hold as a lower bound, but the pressure is on the downside short term. Furthermore, ASW-spread levels continue to grind wider given the significant reinvestment need from the redemptions in the European government bond market during these weeks. We are also seeing a continued widening of the 10Y yield spread between the US and Germany, where the 10Y spread is close to 130bp. However, there has been a limited spill-over effect from the steepening of the US curve between e.g. 10Y and 30Y as well as 2Y and 30Y to EU yield curves.
FX. It was a very quiet session in FX markets with G10 and majors intraday price action kept within c. +/- 0.5% versus the USD.
Credit. CDS indices continued wider yesterday, with iTraxx Xover and Main 10bp and 1bp higher, respectively. Cash bonds continue to outperform, with IG slightly tighter on the day and HY only marginally wider. Several US banks published Q3 results yesterday and the overall trend from Tuesday continued with provisions coming in lower than expected and overall results generally better than expected.
Nordic macro and markets
Today, the September labour force survey will be out in Sweden and our eyes will mainly be on: (1) furloughs; we come from summer months, which may have affected the last months’ numbers (workers who were laid off and who were on holiday may have listed holiday as their main reason for absence), which is why today’s number is particularly interesting and (2) how hours worked have developed during September. Hours worked correlate well with other monthly indicators such as GDP proxy, household consumption and production figures, which means that we will get another indication of how Q3 actually developed. So far, data indicates strong growth and we expect today’s number to confirm this picture. Regarding the unemployment rate, we expect it to be stable at the same level as in August (9.1% seasonally adjusted).
At yesterday’s monthly unlimited 3M F-loan auction in Norway only NOK6bn was allotted. This was clearly to the low side of our expectations. To us this suggests that scarce and unevenly distributed liquidity will remain a market theme over the coming month, which not only brings NOK51bn worth of F-loan run-offs but also substantial tightening of structural liquidity.
The Danish Debt Management Office sold DKK7.5bn at Wednesday’s T-bill auctions, which was the highest amount since 10 June. Thus, the DMO chose to make use of almost all bids received resulting in low bid-to-covers and cut-off rates at the same levels as at the most recent T-bill auctions of -55bp and relative to German Bubills, Danish T-bills have underperformed quite a bit during the past three weeks. We suspect that the reason for ramping up sales in short-dated paper once again is the DMO being slightly surprised about the fast pay-out of vacation money.
