Markets
Eco data in the Europe and the US (spending and income data, Chicago PMI) mostly beat expectations last Friday. The eyecatcher was EMU Q3 growth rebounding 12.7% Q/Q with similar upside surprises in EMU member states. However, the direct impact on trading was limited. European equities opened lower after US futures turned negative late Thursday. However, indices soon found an intraday equilibrium and mostly closed the day unchanged to even slightly stronger. US equities were not able to reverse the tech-driven decline and closed with losses between 0.59% (Dow) to 2.45% (Nasdaq). Interesting, even somewhat strange moves on the (US) bond markets. The US yield curve bull steepened despite the decline in US equities. Yields rose between 0.6 bp (2-y) and 5.8 bp (30-y). Do investors prefer cash above US Treasuries ahead of the outcome of the elections? Are investors still positioning of a big stimulus package? Or are they worried on additional supply (quarterly refunding plans to be released later this week)? German Bunds again outperformed with yields rising only modestly between 1.5 bp (2-y) and 0.6 bp (30-y). The dollar initially hovered sideways but finally kept a better bid during the US trading hours. The trade-weighted dollar (DXY) revisited the 94 barrier and EUR/USD drifted further south in the 1.16 big figure (1.1647 close). We see the decline in EUR/USD at least as much due to euro softness (deteriorating eco prospect due to new lockdowns) than outright USD strength. Euro weakness also helped EUR/GBP to revisit the 0.90 barrier, but GBP traders also took into account some potential progress in the Brexit negotiations. EUR/GBP closed at 0.8996.
Sentiment in Asia is improving this morning with regional equity indices on average gaining between 0.5% and 1.8% (Nikkei). US and European futures are little changed. The yuan is holding up well as China PMI’s showed that the recovery stays on track (cf infra). The Aussie dollar is testing the AUD/USD 0.70 barrier. The dollar retains the benefit of the doubt. The TW dollar (DXY) is trading north of 94. EUR/USD is changing hands in the 1.1640 area.
Today’s eco calendar contains the final EMU manufacturing PMI and the US manufacturing ISM. Activity in the manufacturing sector is expected to remain quite resilient despite rising uncertainty on corona, also in the US (ISM expected at 55.6 from 55.4). However, the focus for trading will be on the developments with respect to the corona pandemic and even more to the US election. With respect to the latter, we expect (US) markets to keep a wait-and-see approach with the focus on whether the Democratic Party can gain a majority in the Senate. The divergence between US and German yields persists. The 10-y yield quite easily regained the 0.80 barrier. The German 10-y yield still struggles not to fall below the -0.64 barrier. EUR/USD is nearing the key 1.1612 support. A break would open the way to the 1.1495 area. However, investors might turn more cautious on additional USD long exposure ahead of what is still a binary risk for the election outcome. Sterling last week profited from headlines that Brexit negotiations are moving in a good direction, but new UK lockdown measures dampen enthusiasm for further sterling gains. EUR/GBP currently returns north of 0.90.
News Headlines
Oil prices plunged as much as 5.6% this morning after a truce in Libya’s civil war enables the country to ramp up production to 1 million b/d just as the coronavirus pushes many countries into semi-lockdowns again. The move took markets by surprise and is another worry for OPEC+, which could be forced to postpone its planned 2m b/d increase by January.
Chinese official PMIs were slightly better than expected, rising marginally to 55.3 (composite) and 56.2 (non-manufacturing). The manufacturing gauge stabilized at 51.4. New orders continued to rise in both sectors. Optimism about future business activity remains elevated with companies looking beyond the pandemic. Employment remains in contraction territory though. This morning’s private manufacturing Caixin PMI shows a similar pattern.
