Markets
Tuesday’s impressive revival in the reflation trade shifted into a lower gear yesterday, but underlying trends remain mostly intact. Recent important steps on the roll-out of a vaccine still supported some kind of return to normal scenario somewhere next year. Investors also drew comfort from renewed hope on a, admittedly, smaller US stimulus package (bipartisan proposal of $908 bln) as US Republicans and Democrats are again on speaking terms on this topic. The US ADP private labour market report missed expectation (job growth of 307 000 vs 444 000 expected) but had little impact on trading. US equity indices reversed earlier losses and closed the day little changed, still near record levels. The steepening trend on the US yield curve continued with the 30-y rising 1.25 bp. German yields showed a similar pattern (30-y + 1.2 bp). The dollar met follow-through selling after breaking key technical levels earlier this week. The TW dollar (DXY) finished at 91.12. EUR/USD closed north of the 1.21 big figure (1.2115). Growing nervousness on the outcome of the Brexit negotiations caused additional nervousness in sterling trading. EUR/GBP rallied higher north of the 0.90 barrier (close 0.9064). Losses in cable were more modest due to overall USD weakness. Still the UK currency wasn’t able to sustain above the 1.34 level (close 1.3365). The zloty and the forint faced intraday headwinds as the rift with EU on the rule of law condition to receive EU funds intensified.
Asian equities mostly trade with limited gains. China underperforms slightly even as the Caixin services PMI jumped from 56.8 to 57.8, indicating that the recovery is broadening. The yuan hardly profits from the broad USD decline (USD/CNY 6.5640). AUD/USD is testing the 2020 top (0.7414/20 area). Australian assets and its currency amongst others, are support by the ongoing rise commodities, including iron ore. US equity futures face a limited setback as LA ordered residents to stay at home. US Covid fatalities and hospitalizations are at record levels. The dollar remains in the defensive.The TW dollar (DXY) dropped below the 91 handle. EUR/USD is holding north of 1.21.
Later today, the US weekly jobless claims are expected more or less stable after rising two consecutive weeks. The US services ISM is expected to ease from 56.6 to 55.8. The impact of the rise in new infections in the US might weigh on activity short-term, but we don’t expect it to derail the reflation trade anticipating a return to normal next year. Markets will also keep an eye at the outcome on the OPEC+ meeting. Sources report that a more gradual tapering of the production cuts might be on the cards. In a daily perspective, the rise in LT (US) yields might slow/pause, but we don’t see a strong reason to row against the tide. This also applies for the German /European interest rate market. De by-default USD trend remains south. A sustained/confirmed break of the 1.2103 level (76% retracement since 2018 top) would further solidify the EUR/USD uptrend. As long as there is no clear signs of a breakthrough in the Brexit negotiations EUR/GBP might nervously hover up and down in the 0.90 big figure.
News Headlines
The Polish central bank (NBP) kept rates unchanged at 0.10% yesterday. It will also continue to purchase government bonds. The NBP acknowledged the vaccine progress has improved global sentiment but said the pandemic remains a large source of uncertainty. The recent tightening of restrictions due to the second wave will probably topple Poland back into negative growth in Q4. The NBP repeated that the recovery pace might be reduced due to what it considers a rather strong zloty. EUR/PLN finished slightly higher near 4.474
US Congress passed legislation that would force Chinese companies listed on US exchanges to give the US accounting board access to the audited accounts to check whether they comply with US standards. If it doesn’t, Chinese companies could be forced to delist.
