Sunset Market Commentary

Markets

Risk-off remains the by default bias on global markets today even as there was little in the way of hard economic news to guide trading. High (US tech) valuations and low visibility on Fed policy are most often mentioned. Whatever the reason, yesterday’s selling/risk-off in the US also again spilled over to Asia this morning. In this move Japan was an underperformer in equities (Nikkei -3.21%) but also LT Japanese government bonds again showed signs of stress with several LT yields (40-y 3.68%, 10-y 1.75%) testing/touching multi-year lows. Admittedly political tensions between Japan and China probably are part of the reason for the underperformance of Japanese equities. Even so, it is striking that selling accelerates even as the new government is discussing big additional fiscal stimulus. The lingering debate on fiscal sustainability apparently makes that more fiscal stimulus is no longer a support for local risk assets. Later today, BOJ governor Ueda reported on a meeting with PM Takaichi. He labelled the meeting as candid and good. He indicated that there was no request from the PM on BOJ policy. This suggests that the BOJ can proceed with gradual policy normalization according to what it deems necessary. While confirming the BOJ’s independence, it also is another indication that there is little room for an Abenomics 2.0 policy with both fiscal and monetary stimulus.

Whatever the domestic issues potentially being at work in Japan, the risk-off also again rotated further into European and US equity markets. The EuroStoxx 50 again is ceding 1.7%. The index again trades below the March top, a first technical warning. US indices also again are ceding between 0.5% (S&P) and 1.0% (Dow/Nasdaq). As indicated there was little macro news to ‘explain’ the selling. The weekly US private ADP job report showed an average 2500 of private job losses in the four weeks ended Nov 1, to be compared with a 14.3k average weekly loss in the previous weekly release. The direct impact on global markets was limited. The US curve bull steepens with yields easing between 5.0 bps (2 & 5y) and 1.8 bps (30-y). Also the German/EMU yield curve steepens slightly (2-5-y German yield minus 3 bps; 30-y +0.5 bp). The outperformance at the short end to some extent probably is somewhat of a correction after EMU money markets recently sharply reduced the probability of a final ECB rate cut next year. Still hardly any directional moves in the major USD cross rates. EUR/USD is going nowhere near 1.16. DXY holds near 99.5 (marginal daily decline). The yen still underperforms with USD/JPY trading north of 155 and EUR/JPY even touching all-time record levels at 180+.

News & Views

Usage of the Bank of England’s long-term repo facility (six months) dropped to a three-month low during today’s weekly operation. Financial institutions borrowed around £1.28bn, down from £6bn the week before and the lowest since August 26. The steep drop comes after the BoE raised the cost of drawing on the facility to Bank Rate + 3 bps from 0 bps. That decision was already announced in June and intends “to balance incentives for participants” between the short-term repo and long-term repo facilities. The central bank’s short-term (one week) repo received £92bn of usage last week, the second highest since the BoE introduced it on the same day it started to sell gilts from its portfolio in 2022. Threadneedle Street seeks to shift towards a repo-led model for providing liquidity instead of outright bond buying.

The Hungarian central bank (MNB) kept the policy rate unchanged, once again, at 6.5%. It said that tight monetary conditions remain warranted due to risks to the inflation environment as well as trade and geopolitical tensions, with the latter in particular a risk for HUF weakness. The MNB said that the currency’s strengthening since the beginning of the year is beginning to show in purchase prices and added that FX market stability is of key importance in reducing inflation expectations – which remain elevated among households. Inflation itself stood at 4.3% last month with government price-dampening measures masking actual inflationary pressures. The central bank expects the inflation rate to ease into the 3% +/- 1ppt tolerance range by end-2025 and decrease further in early 2026. Growth should pick up next year amid improving exports and continued strong consumption dynamics. The government’s increased budget deficit (to 5%) in 2025 and 2026, the central bank said, is having a stimulating effect on domestic demand. Today’s expected policy outcome fails to inspire HUF. The forint remains near a 1.5 yr high around EUR/HUF 384.3.