Markets:
Global trading entered calmer waters after impressive swings earlier this week. The week started with a huge risk rally on the US election outcome and on positive results on the development of a corona vaccine. This rally met some profit taking yesterday as good news was discounted and counterbalanced by a further spreading of the second corona wave in the US, Europe and even in some Asian countries. Markets today kept a balanced approach going into the weekend. European and US equities show resilience, despite an unconvincing start in Asia. European equites are gaining up to 0.5%. US indices opened with gains of about 0.75%. There were plenty of data but most of them outdated. EMU Q3 growth was revised marginally lower to 12.4% Q/Q. Major central bankers (Powell, Bailey, Lagarde) at an ECB forum yesterday confirmed their commitment to support the economy as long as necessary. Support will mostly come for the central bank’s balance sheets, rather than from interest rate adjustments. This might give some comfort to bond investors. US yields are little changed today. German Bunds outperform with yields declining by 0.4 bps (2-y) to 2.1 bps (30-y). Intra-EMU government bond spreads also show no big moves, but the prospect of ongoing ECB support caps any correction on the recent spread narrowing trend. (Greece slightly outperforms today, -3 bps).
The sharp moves in risky assets and interest rates didn’t give directional guidance for USD trading this week. A sharp rise in US (real) yields initially caused some modest USD gains (despite the risk rally). However, the trade-weighted dollar and EUR/USD perfectly stayed within ST technical references. The trade-weighted dollar is going nowhere (currently high 92 area). Last week’s rejected test of 1.1612 put a solid floor the EUR/USD cross rate. First topside resistance near 1.19 was tested on Monday, but a break also didn’t succeed, leaving the pair in an indecisive pattern. USD/JPY temporary jumped on the global risk-on and rise in core yields, but the pair returned back below the 105 barrier today. Similar conclusion: inconclusive!
A combination a poor data, a less positive risk sentiment and market impatience on the Brexit negotiations yesterday also caused sterling to return most of this week’s gain. The EU-UK trade negotiations this weekend will traverse yet another informal deadline (mid-November). However, there is no indication that this ‘make-or-break moment’ will yield any better result than all the other deadlines that have expired during the long-drawn brexit process. Some hardline Brexiteers leaving PM Johnson’s team (including PM Johnson’s chief adviser Cummings) in theory could be seen as making a compromise a bit easier. However, at least today, it didn’t change the assessment of sterling traders. EUR/GBP hovers in the 0.8975 area.
Among the smaller currencies, the Turkish lira staged a remarkable comeback this week as markets anticipate that personnel changes are a harbinger of a more orthodox policy. President Erdogan today reiterated that bringing inflation back to single digit asap remains a key policy objective. The CBTR is expected to raise its policy rate next Thursday. The lira gained slightly further ground today (EUR/TRY 9.07 area, compared to 10+ levels end last week).
News Headlines:
The Hungarian economy rebounded by 11.3% Q/Q in Q3, beating 10.2% Q/Q expected and following a 14.6% Q/Q GDP drop in Q2. The economy remains down 5.6% in the first three quarters of the year compared to the corresponding period in 2019. Growth in information & communication as well as financial services cushioned the economy from an even deeper Covid-cut. The Hungarian forint didn’t respond to the GDP release. EUR/HUF changes hands close to the sell-off low of 355.
