Risky assets cratered and (US) core bond yields slumped yesterday. (Near) record tallies in coronacases reported in many parts of the world including in Europe and the US and new restrictive measures will dampen growth in the fourth quarter. The hoped-for V-shaped recovery risks turning into a W, forcing markets to reposition accordingly. Meanwhile, fiscal aid talks aren’t going anywhere. European stocks fell up to 3.7% (Germany). Wall Street lost 2.29% (DJI) though closed off intraday lows. Brent oil prices finished close to key support at $40. US Treasuries jumped amid risk-off, shedding -0.6 bps (2-yr) to -4.9 bps (30-yr). The US 10y yield performed a proper test at the upper bound the sideways trading range (at around 0.80%) it recently escaped. The German Bund didn’t really join the US reflation trade steepening over the past few weeks, causing it to underperform, even lose, during yesterday’s risk-off session. German yields eventually closed unchanged. The dollar could/should have gained more given the losses on stock markets. EUR/USD fell from the 1.186 area to 1.181. USD/JPY’s test of 105 failed. Sterling reversed an early strengthening course and closed only marginally higher to the euro (EUR/GBP at 0.907 vs. 0.909 at opening).
Asian-Pacific stocks opened in the red following WS but have managed to recoup some of the losses by now. New Zealand underperforms coming out of a long weekend. South Korean Q3 GDP beat estimates (see below). Equity futures find composure after yesterday’s sharp sell-off, trading slightly in the green. The dollar already forfeits part of Monday’s gains. EUR/USD is headed north (1.1833). USD/JPY trades in the 104.7 zone. Changes in core bonds are marginal.
Today’s economic calendar only contains US durable goods orders for September and the Conference Board Consumer Confidence (October). Industrial bellwethers Caterpillar and 3M are publishing Q3 earnings. News from the coronavirus is probably going to be overwhelming once again though. In this respect we’re wary to already call the turning point on equity markets. Many countries have taken – sometimes strict – steps to contain the spread but the impact can only be assessed within a week (or two). In the meantime, Covid-tallies will continue to rise. We think there is still some room left for markets to adjust to a double-dip scenario. Along with election uncertainty (Biden’s lead is narrowing), that should provide a solid bottom for core bonds over the coming days. We hold to our view that the dollar isn’t certain to profit materially given the nature of the uncertainty. Yesterday’s lackluster dollar performance strengthens our case. EUR/USD 1.186 (October highs) is first intermediate resistance. Trading in sterling is a waiting game. There is little news from the intensified Brexit talks, scheduled to run until tomorrow, so far. We stick to the idea that only (prospects of) a deal would help the pound higher short-term.
South Korean Q3 GDP data beat forecasts, rebounding by 1.9% Q/Q (1.3% Q/Q expected) from two consecutive declines in Q1 (-1.3%) and Q2 (-3.2%). Details showed a significant boost from net exports as external demand returned. Exports jumped by 15.6% Q/Q while imports rose by 4.9% Q/Q. Especially large tech manufacturers rapidly returned to business as usual and even better during lockdown recession. Apart from that, the South Korean government rapidly added mass testing and contact tracing to strict lockdown measures which helped batter the virus. The South Korean economy will be one of the outperformers this year with probably only a minor contraction.
The US Senate voted 52-48 in favour of Amy Coney Barrett as next Supreme Court Judge, stepping in the footsteps of late liberal judge Ruth Bader Ginsburg. For the first time since the 1930s, there is a 6-3 conservative majority on the court. Barrett’s nomination gives a final boost to US President Trump’s campaign ahead of the November 3rd elections.