Trading started in slow motion yesterday as US cash bond markets were closed (Columbus Day). Still, the established trends remained in place. European yields extended their march north and are near or even surpass key technical levels. In a session without key data, German yield rose another 2 bps (2-y) to 3 bps (5 & 10-y). The 10-y yield easily took out the -0.15% level, the final hurdle ahead of the -0.07% May post-corona top. The 10-y EMU swap (0.28%) already trades well north of the comparable May top. A sustained break would suggest that rates are entering a new era. It deserves close monitoring. Persistent high oil/commodity prices of late raised inflation expectations, but yesterday’s move was mainly driven by higher real yields. In theory, this might be a sign of markets anticipating ECB tapering too. However, policy easing remains subject to hefty internal ECB debate. ECB’s Lane repeated the ‘temporary inflation’ mantra as he advocated that one-off wage increases do not per se contribute to sustained higher underlying inflation. Equity markets lost modest ground, with the US underperforming (S&P -0.7%). In FX, the DXY USD index held north of 94 (close 94.32), but this move was due to a sharp jump in USD/JPY (close 113.31 from 112.24). The yen suffers from higher core (real) yields/rising yield differentials. Moves in other major USD cross rates were more modest. EUR/USD is holding near recent lows (close 1.155). Short-term UK yields continue to rise (2-y + 5 bp) as the debate on an early BoE rate hike evolves (comments from Saunders and Bailey). However, for now it doesn’t cause any further sterling gains, not even against the euro. EUR/GGBP closed at 0.849.
Asian markets stay in risk-off modus. Oil and other commodities holding at high levels are fueling uncertainty on growth going forward as does China regulation (state banks). The DXY USD index is holding stable near 94.30 as USD/JPY (113.25). Later today, the US NFIB small business confidence and German ZEW investor sentiment are interesting, but no real market movers. Several ECB members including Lagarde, Lane and Villeroy will speak as will Fed members Clarida and Bostic. With interest rate markets at key technical levels we keep a close eye at investor interest for US Treasury’s $ 58 bln 3-y action and the $ 38 bln 10-y sale. The EU will issue its first green bond, selling 15-y bonds for an amount of € 12 bln. At first sight, the odds look still good for further USD gains (risk-off, inflation fears, interest rate advantage). Even so, USD gains against the euro recently slowed. The ST picture remains EUR/USD negative as long as the pair trades below 1.1665. Even so, a quick drop to the 1.1495 support also didn’t occur. UK labour market data published this morning were solid, but close to expectations. Later today, UK’s Frost delivering an important speech on the Northern Ireland Protocol, might cause some sterling nervousness.
The central bank of South Korea kept the main policy rate unchanged at 0.75%. Two members voted for a back-to-back increase following the August 25 bps hike. Governor Lee said, however, that if the current situation doesn’t differ too much from the one they will be looking at during the November meeting, an additional hike “will be good to consider”. The BoK expressed confidence in the economic recovery while flagging risks from accelerating inflation to worsening financial imbalances, including an increase in household loans and rapid housing price rises in all parts of the country. The South Korean won slips vs the USD this morning, mainly in risk-off trading. USD/KRW touched the 1200 handle for the first time since July 2020.
The Turkish lira dived to another all-time low against the USD yesterday (USD/TRY >9) and hovers near Monday’s close this morning. Both sides of the equation played their role with broad-based dollar strength and a weak lira. The latter resulted from president Erdogan threatening with military intervention in neighboring Syria where Turkey-backed rebels are fighting forces loyal to the Syrian president and Kurdish militia. The domestic situation doesn’t support the currency either as headline inflation spiraled to 19.6% in September while the central bank recently cut policy rates to 18%. Furthermore, markets fear additional rate cuts due to core inflation – the CBRT’s preferred gauge – showing preliminary signs of topping out, even as it still amounts to 17%.