Ebola, EU Politics And Brazil's Election in Focus

The dollar is little changed on the day against the majors. The euro is trading at $1.2650 and the pound at $1.6050. The dollar is just above the ¥108.0 against the yen.

There was also little notable price action in the EM space except the ruble, which continues to underperform and make new all-time lows. TRY and ZAR are weaker on the day. BRL closed at 2.50 yesterday, after making a cycle high of almost 2.52 ahead of Sunday’s election.

The MSCI Asia Pacific index was marginally higher, helped by a 1% gain in the Nikkei. European indices are down slightly near midday, while US futures are pointing to a lower open. Of note, oil is giving back some of its outsized gains yesterday, down nearly 1% today.

The headlines about a NY doctor testing positive for Ebola yesterday took off some of the enthusiasm for risk takings. Mali also confirmed its first case of Ebola. The S&P came off 10 points and futures are negative. Also weighing on sentiment, Amazon posted the largest losses since its IPO in 2004, leading shares 10% lower in after-hours trading. Fourth quarter profits missed estimates by a significant margin.

Intra-EU politics is set to heat up again after it demands more funds from the UK and the Netherlands. Brussels is asking for €2.1 bln from the UK because of its relatively better economic health. The Netherlands is on the hook for €642 mln for the same reason. Needless to say, this comes at a very unpleasant time for Cameron, since it’s just a few weeks ahead of the Rochester by-elections, where the far right-wing party, UKIP, is holding a large lead. UKIP leader Nigel Farage has already opined on the matter: “The EU is like a thirsty vampire feasting on UK taxpayers' blood. We need to protect the innocent victims, who are us.”

Separately, the UK reported Q3 GDP, the first of the major countries to do so, and it came in right on expectations. Growth came in at 3.0% y/y, and 0.7% q/q, slightly lower than last quarter’s figures at 3.2% and 0.9% respectively. Very little reaction was seen in either sterling or gilts.

Data out of Europe today was mixed. Germany reported November GfK consumer confidence at 8.5 vs. 8.0 consensus and 8.3 in October. Italy reported August retail sales at -3.1% y/y, considerably worse than the -1.7% reported in July.

New Zealand’s September trade balance was twice as wide as expected at –NZD 1.35 bln. The miss was largely due to an unexpected jump in imports, up 23%. This was largely due to aircraft imports (Dreamliners) and without it, imports would have risen only 13%.

During the North American session, the US will report September new home sales. Consensus is for a -6.8% m/m drop, payback from August’s 18.0% gain. France will also report September jobs data, with job seekers seen rising 5.9k vs. -11.1k in August.

Tonight will be the last debate ahead of Sunday’s much awaited presidential elections in Brazil. Dilma goes in as the clear favorite against Aecio given the recent polls showing that she now has a considerable lead (8-6 percentage points, depending on the poll). Of course, the gross underestimation of the results by the same polls in the first round led a huge surprise for most observers – including us – when Aecio’s performance had been vastly underestimated. Still, markets have mostly made up their minds with USD/BRL closing at 2.5 yesterday and the Bovespa index down 18% since its highs in September.

Reflecting the odds, Brazilian markets are pricing in an asymmetric distribution of risks around this binary event – though we think it has gone a bit too far. We note here that although Dilma is most likely to win in our view, Aecio’s chances are greater than what markets seem to be pricing in. So we would prefer to be long into the weekend, even though the result will probably be negative. In any case, we are pretty confident that the losses to Brazilian assets will be much smaller in the event of a Dilma victory than the gains should Aecio wins.

Separately, Brazil reports September current account data. The deficit is seen at –BRL7.0 bln vs. –BRL5.5 bln in August, and would lead to further widening of the 12-month total to –BRL82.6 bln from –BRL78.4 in August. This would be the highest on record, and would likely add to the negative sentiment on BRL. Slow growth had helped improve the deficit, but that improvement seems to be over now. For USD/BRL, support seen near 2.45 and then 2.40, resistance seen near 2.60.