Market movers today
It is the day after the ECB meeting and there may be an ECB sources story clarifying the new stance (see also our ECB review, 29 October). Furthermore, the ECB’s Survey of Professional Forecasters will be released, which may be sour reading for the ECB in terms of forecasting inflation far below the ECB’s target.
Euro area preliminary HICP figures for October will be out today. They will likely show a third consecutive month of deflation in the euro area, but we expect some small recovery in core inflation, which fell to a new all-time low in September.
Also today we get the first reading of euro area Q3 GDP. We have a rebound of 7.3% q/q in our baseline. A strong reading could temporarily cheer markets, but more important will be if and to what degree the recovery stutters in Q4. The EC’s sentiment indicator out Thursday and German IFO on Monday will therefore complement last Friday’s PMI readings on how the economy started in Q4.
Today, we are hosting two webinars on the US election. This morning at 09:30 CET we are hosting a webinar (in Danish) providing an update on the US election and the financial market implications (FX and rates) in different scenarios.In the afternoon at 13:00 CET, we are hosting a webinar on the economic and budgetary implications of the US election. We have invited Marc Goldwein, Senior Vice President and Senior Policy Director for the Committee for a Responsible Federal Budget (CRFB), to discuss the economic and budget implications both short and long term under the Donald Trump and Joe Biden administrations.
The 60 second overview
ECB. Yesterday, the ECB pre-announced a recalibration of the current policies to come in December. It refrained from providing clues of what the package will entail as tasked committees will analyse this in coming weeks. All policy options are in play. We expect the December recalibration to include an expansion/extension of the PEPP by another EUR500bn into end-2021 bringing the total to EUR1,850bn. APP may also be upscaled to EUR30-40bn/month from the current EUR20bn. We expect further liquidity operations via the TLTRO on sweetened terms. We expect an extension of the 50bp TLTRO discount beyond June 2021 to June 2022, an enlargement of the loan eligibility pool to 70% and the additional three TLTRO operations next year, all of three year maturities. Finally, we expect an increase in the tiering multiplier to 10x the reserve requirement. We do not expect the ECB to resort to a rate cut now, but we remain open to the possibility that the ECB could do it.
Equities. Global stock markets are on track for the worst week since March amid political uncertainty on US fiscal easing, COVID-19 resurgence and the return of restrictive measures across Europe. After a needed day in ‘green’ for most of the big US benchmarks, futures are back in ‘red’ this morning following a few disappointing tech earnings reports after the US closure.
FI. The ECB meeting left bonds bull flattening as the ECB clearly pre-announced a policy calibration in December. Core and semi-core rates fell 1-2bp, while the periphery performed 5-7bp led by Italy. This week, BTP-Bund spread has been trading notably choppy on the mixed risk sentiment. Spreads tightened across the board. Bund spreads widened in the morning, but fell back during the trading session. Yesterday’s ECB pre-announcement does not change the FI themes currently prevailing. Still carry friendly, and we favour spread tighteners.
FX. The ECB clearly acknowledged the recent weakness in European macro and sees downside risks. Subsequently, EUR/USD went lower to mid-1.16s. We expect to see some buying interest at these levels as the US election may indeed by next week prove a catalyst of EUR/USD upside still. NOK weakness has returned with a vengeance.
Credit. Sentiment improved in credit markets yesterday where iTraxx Xover tightened 8bp and Main 1bp. They now trade at 366bp and 64bp, respectively. While IG cash bonds also went slightly tighter, HY cash bonds continued to widen and hence made up for some of the widening in CDS indices the previous days when HY cash did not move much.
Nordic macro and markets
Yesterday, we published our Norges Bank preview ahead of next Thursday’s interim monetary policy meeting. In short, despite renewed downside risks from COVID-19 we do not expect any new signals and think the central bank will repeat the message that the policy rate ‘will most likely remain at today’s level for some time ahead.’ Over the past years NB has tended to give very few new signals to markets at the interim meetings and we do not think Thursday will be different. If we are right in our call on NB the announcement should have a limited market impact. Right now the Norwegian market strategy is all about the global COVID-19 news flow as well as the US presidential election on 3 November.
