Markets
EU and US stock markets extended their bullish run yesterday, with Nasdaq returning to its leading role (+2%). Traded volumes were muted though with a lot of US investors out for Veterans’ Day. German Bunds finally found a bid near sell-off lows, but didn’t really gain momentum. German yields fell by 0.5 bps (2-yr) to 2.8 bps (30-yr). ECB Lagarde downplayed/narrowed down the central banks’ stimulus options for December: “While all options are on the table, the pandemic emergency purchase program and targeted longer-term refinancing operations have proven their effectiveness. They are therefore likely to remain the main tools for adjusting our monetary policy.” The current Pandemic Emergency Purchase Programme runs at least until June 2021, with over half of its €1350bn budget yet to be spend. Extending the shelf life of PEPP by more than 6 months is probably tricky though as the ECB justifies the buying by the Covid-crisis. Recent vaccine developments suggest that the acute phase of the pandemic could be over by mid next year. Extending the maturity of TLTRO’s or increasing their number (2 to go) is a quick win. Short term money markets (Euribor 3m FWD curve) almost completely priced out the possibility of deeper negative policy rates this week (vaccine + Lagarde). Several ECB members are scheduled to talk again today as the central bank’s annual forum continues. One of the highlights could be a panel discussion featuring ECB Lagarde, BoE Bailey and Fed Powell. We warned earlier this week that the new market narrative (mass immunity after current Corona-wave) will have implications for monetary and fiscal policy as well. The BoE (last week) and ECB (December) (expected) easing actions might be the final ones for a long time. The Fed will hold its current modus and let a (final) fiscal shot take the blow from the currently exploding US corona-curves. This will have long-term implications for those market pockets banking on unlimited, unconditional support for years to come.
The dollar’s reaction function remains erratic. The greenback bounced off support on a trade-weighted basis (92.13), against the euro (EUR/USD 1.1881) and erased a break below 104 against the yen. ECB Lagarde taking away the lower interest rate carrot could soften the downside in the FX pair, also with US coronacases catching up with Europe and reflationary bets so far harmful for the dollar. The technical picture remains broadly even though and suggests rangetrading between 1.1612 and 1.1881. Sterling frontrunned on a trade deal with the EU this week with EUR/GBP testing key support at 0.8864. We remain skeptical towards additional gains for the UK currency beyond this level even with a deal in place.
News Headlines
The head of the European Single Resolution Board, Elke König, gave a rather lukewarm response to some ECB officials’ idea to put in place a network of bad banks as NPF loans in the EU might be rising due to the economic fall-out from the corona crisis. König assessed that it was too early to currently make a correct assessment on the impact of the crisis on NPL’s. At this stage König advocated that it was better for banks to do address the problem of NPL’s at an early stage.
The RBNZ kept its policy rate unchanged at 0.25% yesterday. However, markets reduced expectations that the RBNZ might move to a negative policy rate next year as the central bank turned more positive on its economic outlook and as it expects the FLP loan program to provide substantial additional monetary easing to the system. Assistant Governor Hawkesby today more or less confirmed yesterday’s market assessment. He indicated that a negative policy rate is still possible if necessary, but that banks can reduce the likelihood of this to happen if there is a big enough pass-through of the favourbale conditions of FLP into lower rates. The Kiwi dollar (NZD/USD 0.6865 area) is taking a breather after yesterday’s rise.
