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Market Update
Asia equity markets were broadly boosted on Tuesday and European equities are following suit in wake of a positive tone to the latest high-level talks between the US and China. The Hang Seng ended Tuesday’s session up 1.3% and the Stoxx 600 is currently up 0.3% and trading at record highs above 490.00. The talks between US President Joe Biden and Chinese President Xi Jinping, which lasted about three hours, did not yield any substantial new agreements on fixing any of the various sources of conflict between the two nations, but were broadly seen by analysts as helping to defuse tensions. Investors will hope that the talks pave the way for further discussion that could eventually result in some of the US’s Trump era tariffs being eased. Further strong earnings and the dovish tone of ECB officials since the start of the week are also being cited as helping underpin European equities.
For reference, ECB President Lagarde and ECB VP de Guindos both emphasised the important of maintaining highly accommodative financing conditions as a means of supporting the Eurozone recovery amid a hit to consumer income due to higher energy costs. The two continued to label inflation as transitory and their remarks were attributed as one key reason for yesterday’s underperformance in the euro, that saw EURUSD tank below 1.1400 for the first time since July 2020. Analysts said concerns about the state of the Covid-19 outbreak in Europe was another reason for the euro to sell-off, with the Netherlands and Austria already implementing lockdown restrictions and Germany set to vote on restrictions on Thursday. For now, the dovish tone of the ECB and positive US/China rhetoric seems to have been enough to support European equities despite the Covid-19 fears.
Turning now to US equities, it was a fairly subdued session yesterday, with major indices ending the session little changed despite a much stronger than expected US NY Fed manufacturing survey which suggests that US growth continued to accelerate in Q4 from Q3’s slowdown. The strong data at the time term US bond yields higher which weighed a little on big Tech, preventing a broad market rally. In premarket trade, E-mini S&P 500 futures are flat around the 4680 mark, not far below recent record highs just above 4700. Bank commentary has been bullish; Mark Haefele, CIO at UBS Global Wealth Management, said “although the S&P 500 remains close to record highs, we think strong economic and earnings growth, coupled with an accommodative policy backdrop, should win out over inflation concerns and support further upside for equities”.
Looking back at bond markets then; US yields are a tad lower and the curve a tad flatter, though are mostly within recent ranges with US markets tentative ahead of the release of the October Retail Sales report at 1330GMT. At present, 2s at close to 0.52% and 10s just above 1.60%. Bonds in Europe, meanwhile, are also quite subdued, with the German 10-year not much above recent lows around the -0.25% mark. ING think the rise in Covid-19 cases in Europe and potentially next in the US and UK is “most obvious risk to risk sentiment” right now and could mean “flatter curves” because “we expect long-end bonds to gather more of that safe-haven demand”.
Turning to FX markets; GBP is the best performer following this morning’s jobs report from the UK ONS. According to Reuters, “data showed British employers hired more people in October after the government’s job-protecting furlough scheme ended, easing some of the Bank of England concerns about the risks of raising interest rates”. Preliminary data showed that employee payrolls rose by 160K in October, taking the total number to 29.3M, about 0.8% higher than pre-pandemic levels. Meanwhile, a UK-based think tank called the Resolution Foundation said that it was taking only one and half months on average for vacancies to be filled, matching the previous pre-pandemic record. Analysts broadly saw the data as indicating that the end of the UK furlough scheme has not triggered a sharp rise in unemployment, thus giving the BoE the green light to hike interest rates next month to 0.25% from current 0.1% levels. Governor Bailey has explained in recent weeks that his decision not to ultimately vote for a hike in November was based on uncertainty about how the labour market would respond to the end of the furlough scheme. GBPUSD is this morning up about 0.2% and testing the 1.3450 area.
Elsewhere in G10 FX markets, the DXY remains firm at year-to-date highs above 95.50, having surged amid the recent downturn in the euro that sent EURUSD under 1.1400 and on towards 1.1350. EURUSD is this morning flat close to 1.1370 as US data is eyed. The positive tone of US/China talks broadly failed to lift the antipodean currencies, with NZD down about 0.2% and AUD flat, with the tone of last night’s RBA minutes and speech from Governor Lowe broadly seen as dovish. USDJPY is about 0.1% higher and not far below recent highs in the 114.30 region, as the pair remains sensitive to movement in long-term US bond yields.
Day Ahead
US October retail sales data at 1330GMT is in the spotlight. Core sales are expected to have risen by 1.0% MoM and headline sales by 1.2% MoM. Industrial Production figures, also for October, are out at 1415GMT. Focus then turns to a heavy slate of central bank speak, including ECB’s Lagarde at 1610GMT, Fed’s Barkin and Bostic and BoC’s Schembri at 1700GMT, Fed’s Harker at 1955GMT and then Fed’s Daly at 2030GMT. Oil traders will be watching for the release of private inventory numbers at 2130GMT.
