Congress, as it was/is unlikely for the Democratic party to break the Republican majority in the Senate. This would impede the new administration to develop a coherent policy. The reaction of equity markets was remarkable. An initial risk-off was soon reversed. Equity investors apparently felt comfortable with some kind of status-quo in the US political landscape. The tax regime and other regulation might be difficult to change in this new context. Tech was again seen as the preferred sector in a world with less fiscal stimulus for the cyclical part of the economy. European equities gained 2.0% on average. Gains in the US varied from 1.34% (Dow) to 3.85% (Nasdaq). A sharp scaling back of expectations for a fiscal reflation trade, caused an impressive bull flattening of the US yield curve, yields declining between 2.2 bp (2-y) and 13.9 bp (30-y). The 10-y yield which spiked to the 0.94% area early in the session, tumbled back into the previous consolidation pattern (0.55% /0.80%). The move was both due to a decline in real yields and inflation expectations. German yields declined less, up to 1.8 bp for the 30-y yield. The dollar initially profited from the uncertainty, but a sustained USD gain was soon blocked by the risk rebound and a decline in US (real) yields. EUR/USD tested the 1.1612 support early in the session, but again closed at 1.1726.
This morning, Asian equities still join the risk rally from Europe and the US yesterday. US equity futures also continue yesterday’s pattern, with the Nasdaq future extending gains. Treasury yields decline further and so does the dollar. EUR/USD is changing hands in the 1.1740 area. The trade-weighed dollar DXY is trading near 93.35. The yuan, which revered a substantial intraday loss yesterday, strengthens further with USD/CNY near 6.64, testing the strongest levels since mid-2018.
Later today, markets will continue to keep an eye at the US election outcome. Biden has the best cards to win the presidential race but there is no final verdict yet, with the outcome in few key states still a very close call. Eco data are second tier today, but the Fed and the Bank of England will decide on monetary policy. The Bank of England this morning as expected raised the amount of bond purchases. From the Fed, no formal change in policy is expected. However, markets will look out for the Fed’s assessment on the economy given the new corona wave and for any guidance on future action (e.g. with respect to bond buying). For interest rate markets, It looks that the reflation/steepening trades are over for now. Core bonds will probably remain well bid as long as uncertainty on the amount of fiscal stimulus persists. Yesterday, any dollar gains were soon blocked and the US currency returned within the established ranges (DXY-EUR/USD). The 1.1612 level proved to be strong support, but we assume that further EUR/USD upside might become more difficult short-term. A lack of progress in the brexit talks and additional BoE stimulus might keep EUR/GBP north of the 0.90 big figure.
The Bank of Japan boosted its bond purchases for 1 to 3 and 3 to 5 year maturities at its regular operation today after cutting the frequency to five from six for the month November. The amount and frequency for long maturities (25y) was kept. The BoJ today bought 500bn yen of 1-3 year bonds vs. 420bn previously and 420b yen 3-5 year bonds vs. 350bn in October. Japanese yields fell 2 to 3 bps.
Italy locked down much of the industrial north in Lombardy trying to rein in the coronavirus after it announced its three-tiered zoning system. Lombardy, labeled a red zone, accounts for more than a fifth of Italy’s GDP. Unlike the spring however, factories in the area will remain open. Also in Southern Europe, Greece is expected to be the latest country to go into a nationwide lockdown as of Friday as it grapples with record increases in new infections.