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Sunset Market Commentary

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The US election results are still being counted as we speak. Markets whipsawed amid the slew of incoming results, from assuming a solid Biden victory (betting odds stood at somewhere around 70% at the start) followed by a Trump comeback (Biden odds slumped to 20%) to back to the former. Biden has a narrow lead in Nevada and in Wisconsin. He also managed to turn the fortunes in Michigan. This is because of the many early votes, of which a majority favours Biden, are being tallied right now. Cashing his lead in Wisconsin and Michigan would mean a Democratic victory, assuming Nevada doesn’t flip red. The outcome in any case will be tight and could well trigger legal battle from Trump if he ends second. The incumbent president already threatened to reach for the High Court earlier today. Meanwhile, the risk of a split Congress – Democrats hold the House, Republicans the Senate – is very real. This means it might be difficult for the next president, be it Biden or Trump, to push through (fiscal) legislation. This looming event risk makes today’s strong equity performance all the remarkable, even as the unofficial US job report disappointed strongly (365k new jobs vs. 643k expected). After a period of risk-off repositioning as markets dialed back the reflationary trade, both European and US stocks trade well in the green. Tech outperforms. Implied volatility eased markedly as the trading session developed. The VIX fell from almost 37 to 30.8 currently. US bond yields hold on to their steep declines though. The US yield curve bull flattens significantly on short covering with yields declining 6.2 bps (5-yr) over 13.8 bps (10-yr) to 17.2 bps (30-yr). The 10-yr yield is flirting with a return to its longstanding 0.55/0.80% sideways trading range even as the US Treasury beefed up supply for the coming November-January quarter (see below). The German Bund underperforms today with yields falling 2 to 3 bps.

The dollar basically forfeited all early gains. Declining US real yields, lingering US constitutional uncertainty and the overall risk buoyancy delivered a triple whammy for the US currency. EUR/USD rebounded after touching key support at 1.1612 during early/Asian trading hours. The currency pair briefly ventured north of 1.17 but is again having a hard time keeping that big fig as US investors join. The trade-weighted USD touched important resistance at 94 in lockstep with EUR/USD’s test before turning south (93.58). USD/JPY had some similar wild swings. The pair is now hovering near yesterday’s close at 104.48. The pound remained in the defensive today. There are little constructive headlines that follow Sunday’s touted progress in talks, delivering a minor setback to sterling. The Bank of England later pushed forward its policy meeting to tomorrow morning. That probably means more monetary easing is on its way. EUR/GBP jumped north of 0.90(2) once again, up from 0.896 this morning. Cable slipped below 1.30 again.

News Headlines

Britain’s Financial Conduct Authority confirmed its approach to the share trading obligation (STO) at the end of the Brexit transition period, if mutual equivalence is not agreed. Unlike its European counterpart (ESMA), the FCA will use the Temporary Transitional Power (TTP) so that UK market participants will continue to be able to access any EU trading venue. The European watchdog said earlier that EU investors can only trade EU company shares in London if they have a sterling listing.

The US Treasury released its latest quarterly refunding statement. In Q4, Treasury anticipates borrowing to be $617 bn (vs. $454 bn of realized borrowing in Q3). Over the next three months, Treasury anticipates increasing the sizes at all of its auction tenors. Next week’s sales will see a third straight quarter record issuance of $122bn of notes and bonds.

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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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