Yesterday, risk sentiment remained fragile even as US markets (Columbus Day) and some Asian markets were closed. EMU equities (EuroStoxx 50 -0.55%) mostly closed in negative territory, but the damage could have been worse given the poor US close on Friday and an escalation of the conflict in Ukraine. Risk-off and growing recessionary fears still didn’t help core Bonds/German Bunds. The German yield curve bear steepened with yields rising between 4.3 bps (2-y) and 18.9 bps (30-y). A big part of the move occurred late in the session as comments suggested that German Chancellor Olaf Scholz on the sidelines of the EU Summit in Prague indicated that Germany would be open to the idea of joint issuance of European Union debt to mitigate the impact of the current energy crisis. If so, it would reinforce a process of common debt issuance that started during the pandemic. Despite the fragile risk sentiment, the idea of more common debt issuance triggered a sharp narrowing of intra-EMU spreads with the 10-y spread of Italy versus Germany easing 21 bps. Any gains in the euro were almost immediately reversed. A bad omen for the single currency. EUR/USD still closed at 0.9702 (compared to 0.9744 on Friday). UK bond markets further underperformed EMU/German markets even as the BoE gave an update on its bond market interventions. It announced some additional liquidity measures to ease the strain on pension funds. It still has ample room to support markets before the bond buying program ends at the end of the week. Still, markets aren’t convinced that stability is guaranteed once the BoE leaves the market. UK yields rose between 19.1 bps (5-y) and 29.2 bps (30-y). At 4.67%+, the 30-y yield is now back at the highest levels since the start of the BoE intervention.
This morning, sentiment in Asian remains outright risk-off with several indices losing between 2.6% (Japan) up to 4.0% (Taiwan). Mainland China outperforms (CSI 300 little changed). US Treasuries feel additional selling pressure with yields at several tenors testing key technical levels. The US 2-y and 10-y yield are testing/closing in on the cycle peak levels at 4.35% and 4.01% respectively. Fed Brainard overnight made some more ‘balanced’ comments that the Fed should assess the cumulative impact of the tightening already implemented. However, markets clearly stay cautious to preposition for a less aggressive Fed going into the key US CPI data to be published on Thursday. The dollar remains almighty (DXY 113.40, USD/JPY 145.75, EUR/USD 0.9685). The 0.9536 year low is again on the radar. Later today, the eco calendar in the US only contains the NFIB small business confidence. CB speakers (Fed’s Mester, ECB’s Lane, BoE’s Bailey and Cunliffe) are a wildcard as is the sale of $40 bln of US 3-y Notes. UK labour market data published this morning were ok (September payrolls growth 69k, unemployment rate 3.5%, weekly average earnings 6.0%), but probably won’t change fortunes of UK (Gilt) markets/sterling.
Polish monetary policy council member Litwiniuk spoke about Orwellian circumstances at the National Bank of Poland. He said that he’s not allowed to meet central bank staff unless with prior approval from NBP governor Glapinski. He only has restricted access to the headquarters of the central bank once a week. His criticism follows newcomer on the MPC Tyrowicz who said after last week’s meeting that the central bank isn’t doing all that is necessary to prevent high inflation from lasting longer. Both members were picked by the opposition-controlled upper house of parliament. EUR/PLN trades near recent highs just below 4.90. This year’s (all-time) low point for the zloty is EUR/PLN 5. The currency suffers from the NBP-stance (talking about a likely peak in policy rates) and the overall risk-off market climate.
The UK economic think tank IFS (Institute for Fiscal Studies) warned that it would require a fiscal tightening of £62bn in 2026-27 to stabilize debt as a fraction of national income. So even, reversing all of the permanent tax cuts in Chancellor Kwarteng’s mini-Budget would not be enough. Kwarteng yesterday announced that he will pull forward his long term fiscal outlook to October 31 from November 23, enabling the Bank of England to take them into account when setting policy on November 3.