Friday’s European PMIs painted a dire picture of the economy going into the last quarter of the year. A double dip scenario is ever more likely as rising Covid cases trigger new restrictive measures, weighing especially on the European services sector. Markets focused on the surprise reading in the German manufacturing gauge however, lifting EMU stocks about 1% higher. Core bond yields trended higher as well but erased all European gains with the US entering dealings. Stimulus talks faltered, dashing any remaining hopes for a deal before the US elections next week. A drop in oil prices after Libya said it would boost production in coming weeks against the backdrop of dampening demand also capped the rise in bond yields. The US yield curve bull flattened with yields falling 3.1 bps (10-yr) to 3.5 bps (30-yr). German yields ended flat after having risen 3 bps intraday. Peripheral spreads tightened with Italy taking the lead (-4 bps). EUR/USD rose to close higher at 1.186, up from an intraday low near 1.18 amid both euro strength first and dollar weakness later. The trade-weighted greenback dipped below 93. Sterling slipped to the euro after slightly disappointing October PMIs and despite reports that France would be preparing a compromise on the matter of fisheries. EUR/GBP tested the 0.91 area (up from 0.903).
Mood at holiday-thinned Asian dealings (HK and New Zealand closed) is downbeat. An outbreak in China’s Xinjiang as well as record cases in the US over the weekend causes shiver down the spine. Protests erupted in Italy over regional lockdowns and curfews to contain the pandemic. Stocks are down 1% in China. Equity futures suggest a similar-sized red European open. Core bonds gap higher (US yields down more than 3 bps), the dollar gains against most major peers. EUR/USD trends lower to the 1.183 area. USD/JPY nears 105 (104.88). The steepening coronacurves will continue dominating trading today with all but the German Ifo indicator due from a data point of view. The eco calendar will get more interesting towards the end of the week though with US Q3 growth, the ECB and BoJ policy meeting due on Thursday and a slew of European quarterly growth figures scheduled on Friday. The earnings season is really gathering pace with many of the hotshots (Caterpillar, Boeing, Visa, Alphabet, Apple, Amazon …) readying for release. Adding to the coronavirus uncertainty and data avalanche are the upcoming US elections next Tuesday. We expect volatile and nervous trading today and later this week in which core bonds might retain the upper hand. We keep a close eye at the US 10y yield, currently trading near 0.813%. Important support (upper bound sideways trading range) kicks in at around 0.8%. The risk-off/uncertainty and US record cases as well as looming and possible disputed elections are a two-sided story for the dollar. From a daily perspective, we assume the greenback to keep the benefit of the doubt. Sterling is monitoring the Brexit debate closely. The UK and EU decided to stretch negotiations beyond the original ending date last Sunday to October 28, suggesting progress is being made. The pound strengthened at opening but we would be careful to bet on further gains in the current setting as long as there isn’t a concrete agreement.
Chinese President Xi Jinping and members of the Communist Party’s Central Committee will meet this week to decide on the 14th “5-yr plan”, stretching from 2021 to 2025, which will set out the economic and social path going forward. One of the focal points is the growth target which will likely be downgraded to the 5%-6% area. The future plan will most likely only be unveiled at the annual parliament gathering early next year.
Brent crude oil slips below $41/barrel this morning for the first time since early October. Global rising Corona-infections and semi-lockdowns imposed by governments question future oil demand, while OPEC+ so far clings to plans to raise supply (by 2 million bpd) from the beginning of next year. Tropical storm Zeta, which is expected to become a hurricane today, could cause some additional volatility as it swirls through the Gulf Coast this week.