Sat, Nov 28, 2020 @ 07:35 GMT
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Sunset Market Commentary

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Market attention shifted to Europe today with new PMIs due. The October readings in most cases already dipped back into contraction territory, suggesting the recovery during the third quarter was a one-off as the coronavirus resurges across Europa (and the US). The EMU composite PMI fell from 50.4 to 49.4, dragged down by the services sector (46.2 from 48) as new restrictive measures are being implemented across Europe. Employment in the sector is still being reduced, albeit at a lesser pace than in the previous month. There’s a notable difference on a country-wide level however, with France scaling back employment but Germany hiring or planning to hire. The manufacturing gauge managed to eke out a gain, from 53.7 to 54.4. Germany was responsible for this unexpected increase. The country posted an unexpected surge from 56.4 to 58 as new (export) orders rose dramatically, with demand especially from Asia-China and the US. That said, employment in the sector, both in Germany and France as in the EMU, remains on the back foot. The readings strengthen, if not confirm the case for a double dip scenario going into the fourth quarter. Nevertheless, markets focused on the upbeat German manufacturing and sent EMU stocks, core bond yields, and the euro higher. Equities advance 1%+. WS opens flat. The Bund underperformed slightly US Treasuries and added about 1 to 1.5 bps across the curve at some point vs. +1 bp in US long yields. Sentiment deteriorated somewhat as the US joined though. Peripheral spreads tighten to core with Italy (-4 bps) outperforming. The euro enjoys a nice ride higher. EUR/USD dipped below 1.18 during early trading but jumped in the wake of the strong German manufacturing PMI surprise. The pair is currently changing hands in the 1.185 area. First real resistance is situated at around 1.19. The trade-weighted dollar’s attempt to regain 93 failed.

UK October PMIs came in slightly weaker than expected today. The manufacturing series declined a little less than expected to 53.3 (from 54.1). Services printed a significant consensus miss, falling from a strong 56.1 to 52.3 (53.9 anticipated), pushing the composite reading down from 56.5 to 52.9. The UK currency traded heavy afterwards, with EUR/GBP – helped higher also by the euro – advancing from 0.902 in the morning to touch an intraday high at 0.907. Some temporary relief for the pound came from reports that France is preparing a compromise on the matter of fisheries. This economically marginal but highly politicized topic of discussions is one of the major stumbling blocks in the Brexit negotiations. The news suggests the EU and UK are making progress. EUR/GBP returned to 0.904 but that didn’t last long. Cable winked at 1.31 twice but this intermediate resistance area holds for now. The fairly limited gains in sterling suggest markets want to see concrete action rather than to trade every headline.

News Headlines

Czech National Bank member Michl expects fiscal policy to be the main player in cushioning the economic blow from the significant 2nd Corona-wave. Monetary policy can turn to wait-and-see mode. He plead again in favour of supporting the government by paying out an extraordinary dividend to the state budget, which the state can do whatever with. Some fiscal impulse, for instance. EUR/CZK is slightly higher today (27.25), but that’s merely on the back of euro strength.

The Russian central bank kept its policy rate unchanged at 4.25%, but said that a rate cut was still possible/likely in coming months. The central bank slightly upgraded this year’s GDP forecast from a 4.5%-5.5% contraction to a 4%-5% contraction while forecasting 3%-4% growth next year. Inflation remains below the central bank’s 4% target, but inflation expectations are elevated. The message was broadly in line forecast keeping the Russian ruble steady near USD/RUB 76.35.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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