The risk rally on global markets simply continued on Friday, even as there was little hard news in the form of eco data or other important (political) events. A new, comprehensive US stimulus package before November 3 election still looks difficult as both Democrats and Republicans are maintaining their red lines in the negotiations. However, markets apparently are drawing comfort from the fact that a convincing lead of Joe Biden in the opinion polls is some kind of a guarantee for substantial further stimulus after the election. At the same time, the Fed continues to repeat that it stands really to accommodate further fiscal support for the economy. This hope on more stimulus currently is enough for some by default risk-on to persist. US equities again closed the session with gains between 0.57% (Dow) and 1.39% (Nasdaq). Gains in Europe remained more modest at about 0.5%. The impact of the risk rally on core bonds was limited. US LT yields declined slightly (-1.5 bp for 30 y), but stay near recent topside levels. The 10-y 0.80% range top/resistance remains within reach. Yields changes in German bunds were also less than 1bp. The broader picture of the German 10-y yield still substantially diverges from the US as it still trades in the lower part of a similar sideways trading pattern. Low global volatility and a constructive risk sentiment still supports a trend of gradual but protracted spread narrowing on intra-EMU bond markets. On FX markets, the standard risk-on trends also continued. The dollar remained under modest pressure with EUR/USD regaining the 1.18 big figure (and closing above). Smaller, less liquid currencies like zloty, the forint and the Czech Krona also outperformed. Sterling initially traded weaker with EUR/GBP returning well north of 0.91, but the UK currency staged quite an impressive late-session comeback. Investors apparently didn’t want to be wrongfooted on the outcome of potential weekend talks among the key players in the Brexit saga.
This Asian equities mostly join the risk rally from WS on Friday. China (+2%) outperforms. Japan (-0.25%) underperforms. The PBOC wants to slow recent rally of the yuan. The bank eased rules to buy foreign currency and fixed the yuan reference rate slightly weaker than expected. (USD/CNY is trading in the 6.7150 area). The dollar remains under modest pressure. The trade-weighted dollar DXY is nearing the 93 barrier. EUR/USD stabilizes near recent top levels (1.1820 area).
Trading for the new week will take a rather slow start as US bond markets are close in observance of the Columbus Day holiday. There are also no important data in EMU and the US. Bunds/the Bund future contract stays well bid, despite the risk-on. The 10-y yield yields fails to really rebound off the -0.55%/-0.60% area. The strong euro and ongoing soft EMU inflation expectations probably are part of the explanation of the Bund outperformance. The break above 1.18 further improves to technical picture of EUR/USD. We don’t expect a big leap higher today, but there is no reason to row against the tide. EUR/GBP hovers in the 0.9060 area this morning. Calls between UK PM Johnson and German Chancellor Merkel and French President Macron for now didn’t yield a real break-through yet. With 15 October EU Summit coming ever closer, we assume more erratic sterling trading.
Oil prices (Brent) rose at some point almost 12% during the course of last week but ended Friday a little weaker after a strike that threated to cut Norwegian production by almost 25% came to an end. Oil prices continue their decline today as US producers began restoring output after Hurricane Delta weakened. Brent now hovers near $42.45/b.
After two weeks of the heaviest fighting since the early nineties, Armenia and Azerbaijan have agreed to a limited Moscow-brokered ceasefire. Subsequent talks won’t be easy though, as Armenia already reiterated its opposition to any role for Turkey, an ally to the Azeri’s, in the talks. Ankara itself said the ceasefire is Armenia’s “last chance to withdraw from the lands [Nagorno Karabakh] that it is occupying”.
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