Sunset Market Commentary

Markets:

The Israel-Hamas conflict dominates headlines today, but the market impact is constraint for now. With Japan and the US closed, traded volumes are low though, suggesting to wait at least tomorrow’s action before drawing firm conclusions. (Slight) risk aversion is the obvious undertone today. Main European stock markets lose 0.5% to 1%. The dollar is the preferred currency with EUR/USD currently trading at 1.0540 compared to last week’s close at 1.0583. Negative risk sentiment helps the Japanese yen to put its foot against the greenback with the pair going nowhere around 149.10. Oil prices spike higher with Brent crude currently near $88/b compared to last week’s close at $84.5/b. Bullion ends a dismal run bouncing off YTD lows around $1825/ounce to $1862 at the moment. German Bund yields correct 4.6 bps (5-yr) to 1.3 bps (30-yr) lower across the curve. Today’s only data point – German industrial production figures for August – printed near consensus at -0.2% M/M and -2% Y/Y. Production in industry excluding energy and construction was up by 0.5% M/M due to a rebound in the car industry. 10-yr yield spread changes vs Germany widen by up to 4 bps for Italy. The Italian spread reached a new YTD high at 207 bps, approaching the December top at 217 bps. Italy’s departing central bank governor Visco touched on the issue in an FT interview. He warned the Meloni government – who performed better than many feared according to him – to listen to market concern about the long-term potential growth rate of the economy. He explains the increase in the debt ratio towards 140% of GDP mainly by that dismal growth. Obviously, Italian spreads are rising against a background of higher risk-free rates, significant budget deficits, worries about rising interest rate expenses and the lack of ECB backing. Finally, we retain comments from Dallas Fed Logan who partly echoed SF Fed Daly last week. She argued that higher term risk premiums could do some of the work of cooling the economy, leaving less need for additional monetary policy tightening. On the other hand, “to the extent that strength in the economy is behind the increase in long-term interest rates,” the central bank may need to tighten more. Later this week, attention turns to the US Treasury’s mid-month refinancing operation with 10-yr Note and 30-yr Bond sales on Wednesday and Thursday, the IMF’s update to the global economic outlook, the ECB’s consumer expectations survey (Wednesday), minutes of the FOMC (Wednesday) and ECB (Thursday) meetings, US September CPI inflation figures (Thursday) and the start of Q3 earnings with Blackrock, Citigroup, JP Morgan Chase and Wells Fargo & Co (Friday).

News & Views:

The Hungarian trade balance again recorded a surplus of €708mn in August. Exports of goods were 0.5% higher M/M while imports declined 0.9% M/M. Compared to the same month last year €-denominated exports declined 1.5% but imports were 19% lower. YTD, the country succeeded a € 5 630mn surplus compared with a deficit of €5,644mn over the same period in 2022. The improvement in the country’s external position is an important factor for the National Bank of Hungary as it supports domestic financial stability, including the value of the forint, allowing for monetary policy normalization. On the other hand, government data published this morning showed that the country reached a government budget surplus in September of only HUF 33,7bn .The cumulative deficit YTD still stands at HUF 3 299bn. Last week, the government upwardly revised its budget deficit target for this year to 5.2% from 3.9%. The forint weakens from the EUR/HUF 386.5 area at the close last week to EUR/HUF 388.5 currently on the global risk-off sentiment.

The Bank of Israel announced a program to sell up $30bn in FX reserves “in order to moderate volatility in the shekel exchange rate and to provide the necessary liquidity for the continued proper functioning of the markets”. In addition to the $30bn program, and as necessary, the Bank will provide liquidity to the market through swap mechanisms of up to $15bn. Despite the announcement, the shekel remains under pressure against the dollar. It trades at USD/ISL 3.9325 compared to levels near USD/ILS 3.85 at the end of last week. The currency now trades at the weakest level against the dollar since early 2016.