OVERNIGHT NEWS
* Bond yields extend losses as stocks drop, RBA hints at possible QE, 10y Bund drops below -0.60%, IRS near -0.30%
* Australia: 10y AGB falls 7bp after RBA governor Lowe says assessing whether 5y-10y AGB purchases will lift hiring; employment fell 29.5k in September, U-rate rose to 6.9%; AUD/USD -0.6% at 0.7123; next RBA meeting on 3 November
* Brexit: PM Johnson to reflect on outcome of EU Council meeting tomorrow before considering next steps, expressed ‘disappointment’ at the lack of progress in Brexit talks with EU’s VD Leyen/ Michel
* Japanese investors bought ¥1,946.5m of foreign bonds last week, most since March, they also bought ¥312.5m foreign stocks
% China CPI decelerates to 1.7% yoy in September, food prices slow to 7.9% yoy; PBoC injects CNY500bn liquidity via 1y MLF at 2.95%, CNY50bn via 7d reverse repo at 2.2%, USD/CNY steady at 6.7221
* Nikkei -0.5%, EUR 10y IRS -2bp at -0.29%, Brent crude -0.1% at $43.3/b, Gold -0.2% at $1,897/oz
Glass half-empty: Euro stocks catching up with Bunds
A marked “risk off” mood in Europe has prompted renewed USD buying, although the factors driving the angst are not new. Among the explanations being offered on the newswires for the sharp drop in European equities and US equity futures, all are familiar and have been evident on days when risk appetite has been stable or even rising. The failure of US fiscal stimulus negotiations to reach an agreement is among the justifications being offered for the risk off mood. Treasury Secretary Mnuchin’s observation at the Milken Institute Global Conference that “getting something done before the election and executing on that would be difficult” is hardly revelatory, but perhaps it reaffirmed the market’s pessimism. House Speaker Pelosi meanwhile told MSNBC last night that, while an agreement is still possible, the two sides remain far apart. Still, it seems that a combination of familiar drivers (US fiscal stalemate, European COVID-19 cases, Brexit uncertainty) are having an acute impact on the risk mood this morning. The USD is happy to capitalise. Today sees the release of August activity readings for Brazil and Peru, as well as manufacturing, IP and retail sales data for Colombia. In all cases Bloomberg consensus estimates are looking for modest improvements from July, but still notably negative y-o-y rates. Later today also sees Chile’s central bank policy meeting, where we are in line with consensus, expecting rates to stay on hold at 0.5%. The broader risk of tone in the equity markets is likely to drag LatAm currencies weaker vs the USD in today’s session, and USD-MXN has risen back up towards 21.50 overnight.El debilitamiento en el impulso del riesgo facilita la diferenciación entre LatAm La ausencia de un paquete de gasto adicional en EE.UU. y el comportamiento generalmente más errático de los mercados conforme nos aproximamos a las elecciones estadounidenses han debilitado a un gran número de divisas de LatAm, región donde el hecho de que los factores idiosincráticos no hayan resultado favorables para algunas ha generado diferenciación. El miércoles, volvimos a ver ciertas disparidades en el bloque, aunque aún en un contexto de consolidación general a la espera de la próxima oleada. La direccionalidad del USD aún podría generar una respuesta general de las divisas de LatAm, donde las políticas monetarias también pueden marcar diferencias. Sin embargo, teniendo en cuenta las incertidumbres tanto políticas como monetarias que hay en este momento, lo razonable sigue siendo adoptar un enfoque de cautela. El COP se recupera gracias al avance del petróleo El COP se comportó mejor que el resto de divisas de LatAm y repuntó alrededor de un 0,7% conforme el Brent avanzaba aproximadamente un 2,1%. El USDCOP ha estado en modo de consolidación durante la mayor parte de las últimas semanas, reflejando la incertidumbre del panorama mientras Colombia se recupera en el contexto de la pandemia. Además, el deterioro de la situación fiscal ha sido un obstáculo para muchos inversores. En cualquier caso, el COP dispone aún de margen para mejorar su comportamiento conforme los problemas a corto plazo se disipan. Dado que el FMI aportará recursos en USD para cubrir las necesidades de financiación de Colombia en el 4T20, el COP podría contar con un soporte adicional a corto plazo. Teniendo esto en cuenta, preferimos mantener un ligero sesgo hacia el COP mientras el principal soporte se encuentra en USDCOP 3.720.
Asian markets trade risk-off with Nikkei 0.5% lower, Hang Seng -2%, Kospi - 0.7%, Sensex -2%, and SHCOMP -0.2%. While the ASX (Australian equities) are 0.5% higher, this follows a better than expected unemployment print (6.9% vs 7% survey) Market sentiment continues to dampen as a result of vaccine optimism and past expectations being marked down while the US still seems far from a fiscal agreement. Yesterday, Treasury secretary Mnuchin snubbed the idea of being able to reach a deal and executing it before the election. This morning, risk-off momentum is fuelled further by virus cases surging in many european countries, increasing expectations of tighter measures. The UK tightens London restrictions to tier 2, prompting another leg lower in european equities. FTSE -2.4%, SX5E -2.7%, DAX -3%. S&P futures are also around 1% lower, while global bond yields also move lower. Later today in the US; the Empire manufacturing survey is expected to fall to 14. Colombia’s data to point sequential recovery in August. We forecast retail sales to have declined by 9.5% y/y from a fall of 12.4% in July, while manufacturing production to have contracted 6.5% y/y from a decline of -8.5% in July. Lower oil prices are reducing the room for maneauver authorities have to adopt fiscal stimulus, while a protracted lockdown has left most business ailing.
Risk aversion characterized the overnight session, with Covid-19 concerns returning to the radar. Both London and Paris have seen new restrictions announced, with the trend set to continue. As flagged in our Coronavirus Cheatsheet, while governments hope to avoid a return to nationwide lockdowns, parts of Europe are running low on options.
However price action was clearly exacerbated by other dynamics. Earnings season is in full swing, contributing to some of the pessimism in US equities. Meanwhile US Treasury Secretary Mnuchin has played down the possibility of a fiscal stimulus package before the election and with less than three weeks to go until the US election, conviction remains low overall.
As seen yesterday, we expect US market participants to pare some of the losses seen overnight. NOK remains the worst performer as a risk proxy, while AUD also has to deal with dovish overtures from RBA Governor Lowe. PLN faces more restrictions today while ZAR and CLP are also in focus.
Global Macro in the driving seat, keeping USDCOP supported above 3800. Our local trading desk continues to see consistent USD buying on dips, which suggests we could see a push towards the top end of the range at 3900.