Market movers today
- Today is quiet in terms of economic data releases. U.S. NFIB small business optimism at 12:00 may attract some attention due to the recession fears.
- We have some Fed speeches today, not least Fed Chair Jerome Powel at 20:30 CET. With investors pricing in a high probability of another cut later this month, the Fed probably needs to correct market pricing in case they are not going to deliver the cut. Consumer confidence on Friday and retail sales next week are going to be vital.
- Otherwise focus remains on politics. Look out for any political statements ahead of the U.S.-China trade negotiations on Thursday-Friday, the Brexit negotiations which need to be concluded this week and the U.S.-Turkey-Syria situation.
Selected market news
On the back of heavy criticism of his decision to not stand in the way of a Turkish incursion into Syria, U.S. President Trump tweeted that "if Turkey does anything that I [...] consider to be off limits, I will totally destroy and obliterate the Economy of Turkey ". Senator Lindsey Graham has threatened Turkey to introduce legislation sanctioning Turkey and suspend the country from NATO if it invades Syria, something which may also affect European politics. The Turkish lira weakened yesterday after the controversy.
Ahead of the U.S.-China trade talks Thursday to Friday, the Trump administration has placed eight Chinese tech companies on a U.S. blacklist. The U.S. says the companies are implicated in the human rights violation against Muslim minorities in China. So far, U.S. and China have tried to distinguish between the trade war and the tech war so it may not mean much for the trade talks later this week.
While a Scottish judge did not intervene in the Brexit Delay Bill discussions yesterday, the judge stated that the government has assured it will obey the law, which requires PM Johnson to ask the EU for an extension in case Parliament has not passed a deal by 19 October. The UK and the EU have agreed to continue talks today. We still think that the most likely outcome is another extension followed by a snap election, see also our Brexit Montor from Friday .
However, a text message (see The Spectator ) from a person inside the Downing Street No 10 is not encouraging for the negotiations and would (if true) only make it more difficult to reach an agreement. Basically, the source hints that any breakdown in the negotiations will be EU's fault and that the UK government will punish countries who accept further delay (e.g. not helping on security). The source also hints that the government will sabotage EU from within in case of an extension and will fight for no deal in an election.
Chinese PMI Caixin services came in weaker than expected by dropping to 51.3 from 52.1 previously. The composite index still rose marginally to 51.9 from 51.6.
Scandi
In Sweden, production value index (PVI) for August is released at 09:30. The data covers industry, services and construction and will provide further information about Q3 GDP. The index is expected to be on the soft side and could thus add further upward pressure to EUR/SEK (see FX comment below).
Fixed income markets
Yesterday, we saw a string of new deals coming to the market. Greece is doing a syndicated tap of the current 10Y benchmark and Italy is planning to return to the USDmarket.
This supply sent peripheral yields higher despite the positive outcome of the Portuguese election, where the left-wing Prime Minister Costa won the election, as well as the upgrade from DBRS to BBB (high) from BBB. Hence, Portugal is one notch away from a single-A rating by DBRS. Furthermore, Italy’s minister of finance expressed confidence in the Italian budget for 2020 being well received by the EU. Currently, the Italian government expects a budget deficit of 2.2% for 2020.
We expect to see strong demand at the Greek and Italian auctions given the strong demand for the10Y inflation-linked bond that Italy sold last week. Here the order book was well above EUR 22bn and they sold for EUR 4bn.
The positive rating outlook for Portugal as well as the stable political outlook sent 10Y Portuguese bond yields lower than Spain for the first time since 2009. The Portuguese PM has stated that the government wants to continue the politics that has sent PGB yields to a record-low level, and thus keep the investor interest strong in PGBs.
FX markets
Over the coming weeks, we see potential for USD to sell off against cyclical currencies such as the Scandies and EM FX, provided an interim trade deal is landed. We do however stress that any breathing space for these amid a continued global cyclical slowdown will likely be temporary. Read more on what to expect in FX after a possible provisional trade agreement in yesterday’s FX Essentials.
EUR/SEK took out a new 10-year high yesterday, and the cross looked set to test 10.90 before eventually settling around 10.88. There was nothing in terms of economic data or Riksbank speeches to explain this sharp move, but instead we put it down to positioning in front of a rather macro-heavy Swedish week. Starting today, production value index (PVI) is expected to be on the soft side and could thus add further upward pressure to the cross.
Even on the back of a hypothetically stronger-than-expected PVI, we believe any correction lower in the cross will be short-lived as the pressure is most likely soon back on again in anticipation of the inflation data due later this week.
A little surprising, the Norwegian government budget is set to be mildly contractionary with a fiscal impulse of -0.2pp. In comparison, Norges Bank projected 0.1pp in its latest monetary policy report which on balance challenges our call for one additional rate hike in March next year. For NOK FX spot, however, the global environment is far more important at this stage. For people interested in the details, the budget revealed a sharp negative revision for the 2019 net cash flow from petroleum activities which explains why the government has withdrawn money from the oil fund over the last two months. The government, however, still expects a total annual net transfer to the oil fund for both this year and 2020. The details suggest a likely daily NOK purchase amount from Norges Bank of NOK 450M – but as always this amount is likely to fluctuate during the year.
Key figures and events
