Market movers today
- Focus is on Brexit negotiations, as today is the last day to reach an agreement ahead of the EU summit starting tomorrow. As obstacles remain, we think a deal is unlikely, but that is not the same as saying the negotiations are breaking down. Our base case remains, however, that we will get another extension followed by a snap election.
- Today's main data release is US retail sales for September. Retail sales have grown for six consecutive months, so we would not be surprised if retail sales disappoint after some strong months. The data release is going to be key for many FOMC members whether to support another cut later this month or not.
- Fed's Kaplan, Evans and Brainard all speak today. The question is whether they are supportive of another Fed cut or not. The Federal Reserve also releases its beige book at 20:00 CEST. ECB's Knot speaks at 14:30 CEST and Lane speaks at 16:00 CEST.
- UK CPI inflation for September is due out today at 10:30 CEST.
Selected market news
Risk sentiment was positive yesterday, which ultimately led to equities up by around 1-1.2% globally and yield up by around 3bp in core European fixed income markets. Optimism about a potential Brexit deal moving closer supported risk assets. Johnson still has a headache though, as DUP sticks to its long-held position as well as the hard-Brexiteers in the ERG group (but the latter has given in to some degree). Our base case remains for an extension and a snap election.
IMF published its new world economic outlook yesterday with a lowering of its global GDP growth estimate to 3% for this year (from 3.3% in April), with a small rebound to 3.4% next year (3.6% in April), with the rebound driven by a number of EM countries. Furthermore, IMF said that global central banks only had 'limited ammunition' to fight a recession and that central bank stimuli can only offset part of the damage caused by protectionism. Overall, the IMF struck a generally downbeat tone with significant challenges ahead for the global economy, pointing to primarily trade, geopolitical tensions, no-deal Brexit and persistently weak economic data as triggers.
In the US-China trade war, sentiment continues to suffer from negative headlines after the 'Phase 1' trade-deal package this weekend. Overnight, Chinese authorities threatened to retaliate with 'strong countermeasures' if the US passes the Hong Kong bill that supports the protesters (which passed through the US House of Representatives yesterday).
The TRY remains under geopolitical pressure although it slightly recovered yesterday from its May 2019 lows. Trump continues to be in dialogue with Erdogan and the current sanctions and Trump's tonality combined with his actions still look mild. Trump has made some steps in order not to irritate the prevailing domestic opinion in the US.
Fixed income markets
Global fixed income markets came under renewed pressure yesterday, as a Brexit deal may be closer. The German curve steepened by 2.7bp to 28.8bp up from the 15bp low reached three weeks ago. 10Y Germany was up 3.9bp to a two-month high. The positive risk sentiment was also visible in Treasury yields, where 10Y yields jumped from a session low at 1.67% to a 1.77% high. Treasury yields are slightly lower overnight. The market is now pricing a 75% probability of a 25bp cut at the 30 October FOMC meeting.
Today, the supply calendar is empty and all eyes will be on a potential Brexit deal ahead of the EU summit that starts tomorrow. However, even if Johnson reaches a deal with Barnier today, he still faces big obstacles at home. If we do not see a Brexit deal today we believe that yields will start to drift lower again. China said it would retaliate if the US Congress passed a bill requiring an annual review whether Hong Kong is sufficiently autonomous to have its special trading status. Hence, trade tensions could easily intensify once again between China and the US.
FX markets
FX markets’ focus today will be on the GBP amid the Brexit negotiations and the USD on the crucial US retail sales release. On the latter, markets currently price the likelihood of a 30 October Fed 25bp rate cut at a roughly 75% probability. A weak print today would propel markets to price in most of the final 25pp, which all else equal should contribute to a weaker USD. That said, the last few days have shown that EUR/USD is sensitive to Brexit news as well with yesterday afternoon’s headline returning EUR/USD above 1.10 on higher EUR rates. As such, Brexit-headlines will be key to follow more broadly.
Sterling rallied further yesterday to only slightly above 0.86. Coming from 0.93 only a few months ago surely a lot has happened but in practice that is not really the case. The key point here is that what prevented Theresa May’s deal could easily happen to Johnson’s: parliament arithmetic and DUP are still a major hurdle. From these price levels and in the coming weeks, the GBP is about to receive a huge reality check as we continue to think that there is still no domestic political backing needed to get anything done and we thus expect to see 0.90 soon again. The what-if scenario is probably 0.85 under a deal. The joker is pricing a scenario with a long extension, an election and a new referendum on Brexit altogether. For now, we suggest to utilise the newfound optimism and not to bet that it will become much stronger towards low 0.80s.
In the Scandies, the NOK has been under pressure in recent sessions, which has been at odds with the usual fundamental drivers and general risk-on in markets. Just one month after the September Norges Bank (NB) meeting the NOK is already almost 2% weaker than projected by the central bank. This alone is an argument for a 10-18bp higher rate path.
This, however, is primarily a story for rates markets as an unjustified weaker NOK raises the likelihood of one additional rate hike from NB in March next year. For now NOK’s decouple from relative rates is set to continue and we need a more substantial change in the global environment for NOK’s carry allure to send the NOK sustainably higher. We stay side-lined in NOK for now as explained in this morning’s edition of Reading the Markets Norway: Norges Bank Preview - no need to adjust market guiding. The interim NB meeting on 24 October should not impact NOK FX paradoxically leaving the Riksbank meeting on the same day more important for NOK.
Key figures and events
