The US equity correction continued yesterday. There were again few eco data to guide overall trading. Investors turned more cautious going into the start of the Q3 earnings season with indices near September all-time highs. The first US bank earnings reports weren’t that bad, but uncertainty on the impact of corona on the performance later this year and next year dampens sentiment. With respect to the talks between Democrats and Republicans, even the ‘believers’ now feel that an in extenso new stimulus packages is highly unlikely to materialize before the November 03 elections. It shouldn’t be a big surprise, but it didn’t help risky assets. US equity indices declined between 0.59% (Dow) and 0.8% (Nasdaq). The correction had only limited impact on US Treasuries, with US yields closing only marginally lower in a daily perspective (30y -0.5 bps). The price action on European bond markets remains much more interesting. The outperformance of German Bunds continued unabatedly with the curve bull flattening (2y losing 1 bp but the 30-y declining 3.1 bps). The German 10-y yield (-0.58%) is now closing in on the key -0.6% support area. The dollar this time hardly profited from the mild risk-off. EUR/USD closed little changed in the 1.1750 area. Sterling initially weakened north of EUR/GBP 0.91 but the UK currency rebounded sharply on headlines that the UK could be prepared to continue Brexit talks even beyond PM Johnson’s October 15 deadline, supporting hope that a disorderly Brexit still can be avoided in one way or another. Sterling closed the day with a solid gain at 0.9027.
Asian equities join the setback on WS yesterday (losses of about on average 1%) and US equity futures suggest the correction/risk-off can continue. Both Chinese CPI (1.7% Y/Y) and PPI (-2.1%) printed lower than expected and suggest that even the Chinese economy might need some support. The yuan weakens slightly (USD/CNY 6.7210). RBA governor Lowe indicating that the bank could buy bonds with longer maturities (infra) is hurting the Aussie dollar (AUD/USD 0.7135 area). Despite the risk-off, the dollar is going nowhere (DXY 93.40; EUR/USD 1.1755).
The eco calendar is again rather thin, but the US Jobless claims, the Empire manufacturing index and the Philly Fed business outlook are worth looking at. The start of the two-day EU summit, amongst others discussing the ‘progress’ in the Brexit talks will be the focus of the day. One can expect lots of rumours and headlines, but it’s unsure whether we already get something concrete today. Further talks with a new ‘deadline’ end October or early November might be supportive for sterling and also slightly for EUR/USD. We keep a very close eye at German Bunds/yields with the 10-y nearing the key -0.60% range bottom. A sustained break would be highly significant from a technical point and might be an indication that the markets is pondering the ECB stepping up policy stimulus sooner rather than later.
RBA governor Lowe noted that Australia’s 10y yield is higher than “almost everywhere in the world”. His quotes are a thinly veiled hint that the RBA is considering to extend the maturities under its asset purchases again. At the moment, they buy short dated bonds to cap the 3y yield at 0.25%. The Australian yield curve bull flattens after his comments with yields declining by up to 6.1 bps (30-yr). AUD/USD declines from 0.7170 to 0.7120. The RBA is widely expected to lower its policy rate from 0.25% to 0.1% at one of this year’s two remaining policy meetings.
Australia, Canada, Italy, Japan, Luxembourg, the UAE and the UK signed on to NASA’s new Artemis accords which set out principles for deep-space exploration. Obvious missing counterparties are Russia and China. NASA hopes to bring the former on board, but Russia is legally prohibited to work with China. NASA needs help in planting a permanent station on the moon and send astronauts to Mars. KBC Sunrise Market Commentary