Market movers today
- Today, we continue to monitor British politics and count how many votes will get behind the deal at tomorrow's vote in the House of Commons. After DUP rejected the deal yesterday, we think it is very difficult for Johnson to get it through Parliament and our base case remains another extension followed by a snap election. However, it may be closer than ever as the FT counted that Johnson is two votes short of getting the deal through the House of Commons, while Sky counted four votes short.
- Otherwise, it is a quiet day today, at least on paper. Most interesting are the central bank speeches. The Fed enters its blackout period tomorrow so we listen closely to what Fed's Kaplan, George and Clarida have to say today. We continue to believe the Fed will cut at its upcoming meeting. Investors agree with a cut priced in by 85% probability. Bank of England's governor Carney and BoE's Cuniffe speak tonight, as Bank of England seems to be moving in a more dovish direction.
Selected market news
Yesterday, the UK and the EU27 agreed on a new Brexit deal, which will now be put forward to the House of Commons tomorrow, Saturday. As DUP has already rejected voting in favour of the deal, it seems difficult for PM Johnson to get it through Parliament. We still doubt the pro-Brexit Labour MPs will vote in favour of a deal, which is harder than the one put forward by Theresa May. Our base case remains another extension followed by a snap election. The EU has on several occasions made it clear that a no-deal Brexit will not be its choice despite the Brexit fatigue in Brussels. The good news is that while the deal may be rejected tomorrow, the tail risk of a no-deal Brexit has diminished further. While we previously feared a Johnson victory in a snap election would lead us to a no-deal Brexit, this is no longer the case. See Brexit Monitor: New Brexit deal but DUP still rejects it - tail risk of no deal Brexit has diminished further , 17 October. The Leader of the House of Commons, Jacob Rees-Mogg, informed that the house sits tomorrow at 10:30 CEST and expects proceedings to be wound up at 15:30 CEST.
The Swedish labour market report did not correct as we expected, as the unemployment rate held steady at 7.4%. We expect the Riksbank to realise the deterioration in economic fundamentals and deliver at least a verbal delay of the intended hike until February but possibly also shift the repo rate path. We still expect a cut in February.
Late yesterday, US VP Mike Pence agreed on a ceasefire with Turkey on the cross-border attack in Syria under certain terms, which reduces the near-term tensions somewhat.
Overnight, Chinese GDP was released at a 30Y low of 6%. However, the more timely PMI indicators show that we have already reached the trough in the Chinese business cycle.
Fixed income markets
The statement from the EU and the UK about a Brexit deal sent bond yields higher on Thursday. However, the uncertainty remains whether the new deal will be voted through the UK parliament on Saturday and bond yields fell, driven mainly by Italy. The bearish steepening of the EGB curves and EUR swap curve was turned into a bullish flattener. We expect that the market will be in a wait-and-see mode until we know the outcome of the Brexit vote in the UK parliament.
In the Danish market the DGB 4.5% 2039 continues to tighten against Germany (DBR 4.25% 2039) and we are now at the most expensive level since the currency crisis in 2015, when there was a big inflow into DKK and the Danish Central Bank had to halt the issuance of government bonds and cut the depo rate to -75bp in order for the DKK not to strengthen against the EUR too much. The spread in 2015 was down to -20bp and there is still some way to go before we reach that number. Furthermore, today we are not looking at downward pressure on EUR/DKK, but rather the opposite, where EUR/DKK is now above 747. A similar move can be seen in the front end of the DGB curve, where the spread between Danish and German government bonds is negative out to 2023. We recommend to use it as a way to go for a tighter spread between DGB 0.5% 2029 versus DBR 0% 2029, which is currently trading at a positive spread of 1-1.5bp.
FX markets
Yesterday, the EU and the UK agreed to put pen to paper. As things stand, a vote will be done over the weekend. We stick to our view that the optimism will not pass the test of the UK’s Parliament’s vote and DUP is going to vote against the deal. As such, markets appear rather optimistic across GBP/USD, EUR/USD, USD/JPY, AUD, SEK, yields and so on. In our view, if a deal does go through, a large part of that move is already priced. Will all of this need to be unwound in the event of an extension when a deal is not done in October, as we believe it will not? In our opinion, the answer is some but maybe not all. As of now, an extension with a deal on the table would help the Conservatives in the (likely) upcoming election. If Johnson should go and win an absolute majority, pricing would probably be fine as it is, because he would then be able to push the deal through without DUP (or others) blocking it. Hence, if anything has changed in terms of politics, it might not be that we get a deal in October but rather that we can get one later and the Conservatives are better positioned in an election with a deal on the table. In other words, the sterling outlook is better from a tail-risk perspective. In a bigger picture, we expect to be trading 0.85-0.90, depending on the mood of the day. Marginally, we would say the risk here is that we end up going higher in EUR/GBP. See more here: New Brexit deal but DUP still rejects it – tail risk of no deal Brexit has diminished further.
The knee-jerk reaction was to send EUR/SEK 10.88 on the back of weaker-than-expected labour market data yesterday, but once it was acknowledged there are some flaws in the official numbers the initial gains were reversed. The SEK also got some positive impetus from the Brexit news and the price action indicates that a deal or no deal may prove important for the near-term outlook for EUR/SEK. In Reading the Markets Sweden, due for publication this morning, we discuss how the Riksbank may assess recent developments going into its October meeting and how it will affect EUR/SEK. There we also discuss foreign exchange liquidity as a potential driver in currency markets.
Key figures and events
