Sunset Market Commentary

Markets

Markets started the week with mostly, technical, order driven trade. Friday’s higher than expected US inflation expectations (U. Michigan survey) and Moody’s downgrading the outlook on the US AAA credit rating (negative from stable) sparked some debate this morning, but in the end were no game-changers. Last week’s rebound in yields slowed, as investors await for additional guidance, especially from tomorrow’s US October CPI report. Headline inflation is expected to ease to 0.1% M/M and 3.3% Y/Y on still favourable base effects. The expected picture for core inflation is more balanced (expected unchanged at 0.3% M/M and 4.1% Y/Y). Markets are more neutrally positioned after the rebound in yields end last week. Interesting to see the market reaction after last week’s ‘guidance of Chair Powell that Fed won’t give too much weight to a few months of good months on inflation. US yields today moved from red to green and vice-versa intraday and currently add up to 3.5 bps (30-y) in a steepening move. The US 2-y yields is holding north of the 5.0%. The 10-y continues testing 4.68%. The German curve is inverting a tad trading between 2.5 bps (5-y) and 1. bp (30-y) higher. ECB’ de Guindos joined recent balanced communication. He sees further disinflationary progress medium term and signs the labour market is cooling. Still inflation remains too high. He even warned on a temporary inflation rebound in coming months. He also advocates that fiscal policy should aim to increase productivity. US equities are ceding most ground after Friday’s break higher, but try to sustain above the technical barriers that were regained (S&P 4400 area, Nasdaq 13715). Eurostoxx50 adds 0.4% on Friday US gains, but the 4200/34 area remains a hard nut to crack. Oil stabilizes near $81.5 p/b.

Technical trading is also witnessed among major FX cross rates. DXY gains marginally, but at 105.90 perfectly holds in the middle of the 104.85/107.11 short-term consolidation pattern. EUR/USD tested the 1.07 area intraday, but was pushed back to the 1.067 area. Softer than expected Japan PPI data helped to support the feeling that further yen losses are the path of the least resistance. USD/JPY (151.85) already set a new 2023 top and is nearing last year’s multi-year top (151.94). A break will bring to pair to levels not seen since 1990 (April 1990 top 160.2). Japan’s Finance minister reiterated that currency moves should be determined by fundaments and that sudden moves are undesirable. However, do recent moves deserve the label ‘sudden’? The UK news flow was dominated by former PM David Cameron returning to the government as Foreign Secretary. However, the impact on markets was limited. UK yields show similar minor changes as in the US and EMU. Sterling is gaining  modest ground both against the dollar (Cable 1.224) and the euro (EUR/GBP 0.8725). Tomorrow’s UK labour data and even more Wednesday’s expected sharply decline in October inflation will decide whether EUR/GBP will finally clear the 0.8750 area.

News & Views

The Italian government may face complications in securing about half of the European Next Gen recovery funds, Bloomberg reported, citing people familiar with the matter. The country will probably obtain the next, fourth installment of $16.5bn but it may become increasingly difficult to meet investment targets and implement the needed reforms quickly enough beyond that. After the fourth tranche, total cash disbursed (grants and loans) totals almost $102bn or 52% of what is made available. There’s a payment deadline for the EU funds in 2026. Missing out on (some of the) remaining resources would be costly. Italy’s huge debt pile and the sharp increase in borrowing costs combined with anemic growth limit its ability to turn to capital markets to fund necessary investments in infrastructure, digitalization, education and green energy.

Brazil has filed a preliminary prospectus for an offering of sustainable bonds for the first time ever. The bonds would mature in 2031 but there’s no info available yet on the size of the issuance. Brazil’s debut in ESG debt markets has been widely anticipated for several years now, ever since the then-Treasury Secretary Funchal announced Brazil’s debt strategy in 2021. The inaugural sale was originally planned for October 2 this year but got postponed after a sharp rise in bond yields. Officials have had a series of meetings with bond investors to gauge their appetite over the recent years. Finance Minister as soon as last week said that the reception of their plans had been “extraordinary”. Proceeds of the bond will be used to fund several green and social initiatives linked to the United Nations 2030 sustainable agenda.