Sterling is gradually losing its nerve as we approach the weekend and the end of the EU Summit without a trade deal between the EU and the UK. EC von der Leyen is willing to go into overtime, but unlikely to soften the EU stance. UK PM Johnson still seems to believe that the current proposal isn’t worth going the extra mile for, threatening instead with the “Australian way”, synonym for no overarching trade agreement. He labels the prospect of a deal in the course of next week as “unlikely”. UK foreign secretary Raab said that a trade deal “depends on the other side”. EUR/GBP rises to 0.91. GBP/USD changes hands near 1.29.

Other markets are holding their nerves quiet well, especially given the volatility of the past week. The Vix remains near the middle of the past month’s trading range (25-35). Talk on a possible US fiscal deal remains in the air, but we still think this is wishful thinking ahead of US presidential elections. European stock markets manage a proper 1.5% recovery after yesterday’s 2.5% beating. US stocks opened with gains of 0.5%. German yields initially fell prey to the law of gravity, nearing yesterday’s intraday lows before rebounding. The German 10y yield currently trades at -0.62%. A close below -0.61% (62% retracement from March spike) would be highly significant from a technical point of view. Especially as it is accompanied by a structural deterioration in economic recovery prospects given the severity of fresh lockdown measures to curb COVID-curves from spiraling out of control. German yields decline by around 1 bp across the curve today. ECB comments remain dovish with Rehn warning for downside inflation risks and ECB Visco saying that a too early withdrawal of policy must be avoided. 10-yr yield spreads vs Germany narrow by around 3 bps. US Treasuries underperform, the curve steepening slightly. The US 30-yr yield adds 1.2 bps. EUR/USD for a second straight session failed to pierce sub the 1.17 handle. The pair profits from the better risk environment, rebounding to 1.1740 before better than expected US retail sales capped intraday gains. The latter were also responsible for the spike lower in US Treasuries. Disappointing production data didn’t alter the picture.

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News Headlines:

US retail sales unexpectedly jumped 1.9% in September after gaining 0.6% in August. The market expected a much more modest rise of 0.8% M/M. September sales are 5.4% higher compare to the same month last year. The core control group retail sales which are seen as closely correlated with the consumer spending in the GDP release, also rose a strong 1.4% M/M after a modest 0.3% decline in August. In a monthly perspective, auto sales (4.0%) , clothing (11%) and department store sales (9.7%) were among the stronger performers.

Core September consumer prices as published by the national bank of Poland, rose 0.4% M/M to be up 4.3% Y/Y (4.0% in August, 4.2% was expected). The reading was the highest in almost two decades. The bank’s core inflation measure excludes the volatile food and energy prices. The NBP has an inflation target of 2.5% with a permissible fluctuation band of +/- 1.0%. Earlier this morning, dovish NBP member Lon advocated the case for further easing. The Polish 2-y yield for the first time turned negative today. The zloty declined further despite the rebound in risky asserts today. EUR/PLN is trading in the 4.575 area. Key support for the zloty at 4.60/63 is coming within reach.


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