The US Payrolls Will Take Center Stage Today

Markets

The ‘post-US election’ rally continued yesterday as markets continued to embrace the idea that some kind of political status-quo (Biden president but with a divided Congress) shouldn’tbe that bad for risky assets/US stocksin particular. US equities again took a strong start but momentum eased a bit further out in the session. Still US indices closed with nice gains of 1.95% (S&P/Dow) to 2.59% (Nasdaq). European markets also joined therisk rally gaining mostly between 1.5% and 2.0%. The European Parliament reaching an agreement on the so called rule of law conditionality to the €750bn recovery fundwas a supportive for European assets.Core yieldsinitially declined a bit further, but gradually found a bottom as the reversal of the reflation traded finally slowed.German yields closed the day less than 1 bp higher. US yields ended the day little changed with the very long end still slightly outperforming (-1.7bps). The Fed policy meeting didn’t bring much high profile news for markets. The Fed left its policy rate and the pace of asset purchases unchanged. The Fed still can change the parameters of the APP if necessary. Fed’s Powell reiterated the importance of fiscal policy to support the recovery. On the FX market, the dollar stayed in the defensive (risk-on) while at the same time the euro was in better shape (removal of the rescue fund hurdle)too. EUR/USD jumped well north of 1.18 (close 1.1826). Dollar weakness was illustrated by a forceful break lower in USD/JPY (close 103.49) with yen strengthening despite the risk-on. EUR/JPY showed a more balanced picture, reversing an earlier rebound (close 122.40). Sterling showed no clear directional trend intraday,despite the BoE stepping up bond purchases by a bigger than expected £150bn and Fin Min Sunak taking additional measures to mitigate the impact the new corona wave. EUR/GBP closed near the 0.90 pivot.

This morning,Asian equity indices show a mixed picture with China underperforming and Japan outperforming (despite a strong yen).The yuan is holding on the gains against the dollar (USD 6.62) after a strong performance yesterday. The yen shows a similar picture (USD/JPY 103.50). The EUR/USD rally is taking a breather.

The ‘outcome’ of the US presidential election remains a factor of uncertainty. However, a Biden win with a divided Congress should be more or less discounted(even if the Senate remains a close call). With respect to the data, the US payrolls will take center stage.A further gradual improved is expected with 593 000 additional jobs, the unemployment rate expected to decline from 7.9% tot 7.6%. The participation rate also remains an interesting variable. A negative surprise might further highlight the need for further fiscal support. The risk rally shifting into a lower gear and a potential negative surprise for the payrolls in theory are bond supportive. However, after the recent steep decline, we expect LT US and German yields to look for some kind of ST equilibrium. The German 10-y at least still didn’t break the -0.64% support in a sustainable way. A slowdown of the risk rally might give the dollar some reprieve.However, the picture remains USD heavy.EUR/USD 1.1881 is next reference on the technical charts. We expected EUR/GBP to hover around the 0.90 pivot as longer as there is no additional positive news on a Brexit deal.

News Headlines

Japanese PM Suga said he’ll work closely with overseas authorities to keep currency moves stable when asked how Japan will respond to any changes a new US government could make to its dollar policy. His comments echoed those from BoJ governor Kuroda on Wednesday and signaled readiness to respond to yen spikes that could derail the country’s export and fragile recovery.

UK’s National Audit Office warned that all UK borders face widespread disruption when the country leaves the EU, whether or not it strikes a trade agreement with the bloc. The situation in Northern Ireland is one of the most challenging. Under the Divorce Agreement, NI is required to perform additional checks on certain goods coming from the mainland. The country is exploring contingency plans.