Trading on European markets more or less developed as one would expect on a day with US markets closed and few eco data to guide trading on this side of the Atlantic. Asian equities still kept a mildly positive bias, but momentum couldn’t be maintained during the European trading hours. European indices currently trade around unchanged levels. There is modest further profit taking on some stocks that profited from the post-vaccine rally of cyclically sensitive assets. In the same context, the rally in oil also did run into resistance. With little other news, traders on European interest rate markets could take a closer look at the account of the October 29 ECB policy meeting. The ECB acknowledged the deteriorating economic outlook due the new rise in corona infections and its impact on economic activity and on inflation. The risks for the growth outlook are clearly to the downside and inflation will likely remain negative through early 2021. This context caused the ECB to signal a recalibration and further policy support for the December 10 policy meeting. The ECB assessment was made before the US election and before the news on the progress of several vaccines that triggered quite a substantial market repositioning earlier this month. Even so, ECB’s Lane in a speech upheld the dovish message from last month’s assessment. Lane highlighted some worrying signals that financing conditions might be tightening. He also indicated that it is inappropriate to let the yield curve steepen prematurely. The dovish ECB message supported a further mild bull flattening of the European yield curve, with German yields declining 0.8 bp (2-y) and 1.9 bp (30-y). With the 10-y German yield at -0.58 bp, one can of course raise the question whether the current shape of the curve/interest rate levels are a potential obstacle for the economic recovery. The accommodative comments from the ECB in theory are also positive for peripheral bonds, but spreads hardly changed today.
The price pattern of EUR/USD was quite similar compared to yesterday even as US markets were closed. EUR/USD again set a minor new correction top in the 1.1940 area this morning, but the momentum again dwindled later. The soft ECB comments pushed the EUR/USD pair to an intraday low below 1.189, but the move stalled soon. EUR/USD currently trades in the 1.19 area. The TW USD-index (DXY) also rebounded off the 91.75 support area (currently 92.10). USD/JPY again decoupled from the overall USD dynamics and is holding near 104.25. Sterling declined slightly further as the deadlock in the Brexit negotiations persists, with both parties indicating that they want a deal, but not at any price. EUR/GBP trended a bit further north of the 0.89 barrier (currently 0.8925).
The Swedish Riksbank left policy rates unchanged at 0% and expects them to stay this low at least until 2023. The central bank expanded its asset purchasing envelope with SEK 200bn to SEK 700bn in a response to Covid-related downgraded growth and inflation forecasts. The Riksbank noted the Swedish krone is close to its fundamental value due to its recent strengthening but for now refrains from any hawkish comments. EUR/SEK slightly rose after the policy change to 10.15..
Germany’s federal borrowing need next year could rise to about 180bn to help fund its spending spree to offset the impact of the pandemic on its economy. It recently decided to extend the support to December 20 as Germany also grapples with a severe second coronavirus wave. The figure compares with the 94bn estimated back in September. Finance minister Scholz acknowledged the increased borrowing need but added that this year’s borrowing ultimately will be lower than the originally budgeted amount of 218bn.