Markets
The astonishing bull flattening trend on core bond markets continued yesterday, especially in Europe. German yields fell by 2.5 bps (2-yr) to 6.1 bps (30-yr). Bond gains on the US curve were less ebullient, but recall that the bond rally in the US started already on Tuesday whereas Europe only joined on Wednesday. Daily US yield changes varied between +0.2 bps (2-yr) and -2.5 bps (10-yr) with the belly of the curve outperforming the wings. The moves once again lacked clear-cut drivers, but was mainly inspired by lower real yields. If any, it suggests that any future tightening cycle will be short-lived as central bankers might face a balancing act between inflation fighting and supporting a potential growth slowdown. Equities rallied in lockstep with bonds while oil prices remain near recent highs. Main stock indices bounced up to 1.5% in Europe and over 1.5% in the US. Yesterday’s moves make a (technical) end to the end September/early October weakness and remind us that the buy-on-dip pattern still holds. Since the November 2020 vaccination rally, the EuroStoxx50 countered 6 corrections to the tune of 5%. We admit though that the recovery time is lengthening with each and every correction. The dollar didn’t really benefit from US Treasuries’ underperformance. EUR/USD is trying to make way above the 1.16 big figure. Recapturing 1.1664 would be a first signal that the September faint is over and that the technical picture could become somewhat more neutral. As for now, the euro doesn’t get any support whatsoever with the EUR/USD bounce mainly inspired by the dollar losing momentum. The trade-weighted greenback (DXY) returned to the 94 big figure after failing to take out 94.47/74 resistance. USD/JPY remains exemption to the rule. JPY up until two days ago proved vulnerable to the rising (real) yield environment. The Japanese currency failed to recover over the past two days though as bonds rallied in lockstep with stocks. USD/JPY trades above 114 for the first time since end 2018. The 2018 top (resistance) stands at 114.55. EUR/GBP in a technical move tested the downside of the EUR/GBP 0.8450/0.8719 trading range in place since April. A break didn’t occur with the pair currently changing hands around 0.8485. Today’s European and UK eco calendars are empty. The failed test might trigger some return action higher. The US eco calendar contains retail sales, the empire manufacturing business survey and University of Michigan consumer confidence. The focus in the data might gradually shift from focusing on price pressure to focusing on indications about (future) growth. Overall, we don’t expect them to be key for trading dynamics. We look out whether the slowdown of the bond rally in the US yesterday spills to Europe today with yields arriving at first technical support levels.
News headlines
BoC governor Macklem said he still expects inflation to be transitory but it’s likely to be more persistent than previously thought. Should, however, the current price increases create ongoing inflation, the BoC will do its job and take action, he added. The governor lauded the fact that Canadian employment surpassed the pre-pandemic peak with last week’s blowout labour report but said it’s not “the destination” as the labour force has grown during the pandemic, meaning there’s still some slack. The BoC overall continues to anticipate a good economic rebound though it may not be as fast as it forecasted in July. The next policy meeting takes places on October 27. The Canadian loonie had another good run against the USD and euro yesterday (USD/CAD sub 1.24, EUR/CAD sub 1.44) and sticks to those gains after Macklem’s speech.
The Securities and Exchange Commission may allow the first US Bitcoin futures ETF to begin trading as soon as this month, Bloomberg reported. That’s a reversal of earlier decisions to reject other BTC ETF applications with a variety of different structures of which the SEC then said they didn’t provide sufficient investor protections. One of the key hurdles was the cryptocurrency’s notorious volatility and worries about insufficient liquidity. With the mood now shifted, the $6.7tn ETF industry is ready for launch. Bitcoin in recent weeks surged and adds another 4% today after the SEC report to trade just shy of $60 000.
