OVERNIGHT NEWS
* Risk-off start to the week, dollar and core yields soft; UK to announce new lockdown restrictions as soon as tomorrow
* ECB to review PEPP programme; debate length of the €1.35trn purchases, transfer of flexibility to other asset purchase schemes (FT )
* PMIs next signpost for ECB/euro/rates on Wednesday, SNB to repeat intervention mantra on Thursday, Banxico f/c to cut 25bp Thursday
* CFTC FX positions: EUR net longs reduced to 27.1% of OI and GBP to 1.5%; long CHF raised to 23.0% and JPY longs to 15.4%, RUB longs cut to 27.5%, AUD shorts jump to 12.3% and CAD shorts trimmed to 11.5%
* China: 1y and 5y LPRs kept unch at 3.85% and 4.65% respectively; USD/CNY offered at 6.7600
* S. Korea: Sept 20d exports rose 3.6% yoy vs prev -7.0%; imports -6.8% vs prev -12.8%; USD/KRW at 1,160, 8m low
* Nikkei closed, Shanghai comp -0.4%, EUR 10y IRS unch at -0.22%, Brent crude +0.2% at $43.25/b
Parade of central bank meetings this week; Mexico and Colombia forecast to drop rates
Scope for short-term outperformance
With oil prices being in consolidation since the start of 2Q20,
the COP’s sensitivity to Brent has steadily declined. External
factors and flows have had a stronger influence on its pricing in
recent weeks, and this dynamic may continue in the near term.
In other words, we don’t expect the COP to lose its high beta.
Some asymmetries are also still present. A big laggard through
July and most of August, the COP has recently caught up, but
there is still scope for further outperformance if flow
momentum picks up. Risk still lingers and is likely to limit the
COP’s upside over time as we reset USDCOP’s wider range to
3,500-3.850.
Although its direct impact on the currency market appeared
mild, Colombian government borrowing was an underlying
source of support for the COP as the Treasury sold dollars to
fund fiscal spending. That began to fade in August, though, and
as with other Andeans, shifts in financing may be less
favourable in 2021. On the other hand, pension liquidation flows
may back the COP if the pension withdrawal bill passes
Congress. Meanwhile, like other central banks, BanRep has
consistently cut rates but in a more prudent fashion, keeping
carry somewhat rich compared to peers. Policymakers have left
the door open for further easing, but have become datadependent.
Several other factors may also weigh on the COP. The oil-price
rebound from the April low certainly enabled the COP’s
recovery, but this support is likely to be limited from here as
OPEC members constantly re-evaluate the production-cut
agreement. Colombia’s increased fiscal deficit is a growing
concern for credit rating agencies going into 1H21. While the
indexation of Colombian assets is still low, another downgrade
would push Colombia’s credit to junk, possibly putting some
pressure on the COP given its sensitivity to Colombia’s risk
premium. The external deficit is also a permanent burden on the
currency. A mild correction in trends may ease the pressure,
but longer-term financing needs will continue to leave the COP
externally exposed.
All in all, the COP has room to rally in the near term, but is
certainly not immune to external shocks and has not been fully
able to shrug off the asymmetries that make it weaken more
when global markets shake and risk aversion arises. Given the
overall circumstances, we would also become more cautious if
USDCOP approaches its support references of 3,500-3,600
With oil prices being in consolidation since the start of 2Q20,
the COP’s sensitivity to Brent has steadily declined. External
factors and flows have had a stronger influence on its pricing in
recent weeks, and this dynamic may continue in the near term.
In other words, we don’t expect the COP to lose its high beta.
Some asymmetries are also still present. A big laggard through
July and most of August, the COP has recently caught up, but
there is still scope for further outperformance if flow
momentum picks up. Risk still lingers and is likely to limit the
COP’s upside over time as we reset USDCOP’s wider range to
3,500-3.850.
Although its direct impact on the currency market appeared
mild, Colombian government borrowing was an underlying
source of support for the COP as the Treasury sold dollars to
fund fiscal spending. That began to fade in August, though, and
as with other Andeans, shifts in financing may be less
favourable in 2021. On the other hand, pension liquidation flows
may back the COP if the pension withdrawal bill passes
Congress. Meanwhile, like other central banks, BanRep has
consistently cut rates but in a more prudent fashion, keeping
carry somewhat rich compared to peers. Policymakers have left
the door open for further easing, but have become datadependent.
Several other factors may also weigh on the COP. The oil-price
rebound from the April low certainly enabled the COP’s
recovery, but this support is likely to be limited from here as
OPEC members constantly re-evaluate the production-cut
agreement. Colombia’s increased fiscal deficit is a growing
concern for credit rating agencies going into 1H21. While the
indexation of Colombian assets is still low, another downgrade
would push Colombia’s credit to junk, possibly putting some
pressure on the COP given its sensitivity to Colombia’s risk
premium. The external deficit is also a permanent burden on the
currency. A mild correction in trends may ease the pressure,
but longer-term financing needs will continue to leave the COP
externally exposed.
All in all, the COP has room to rally in the near term, but is
certainly not immune to external shocks and has not been fully
able to shrug off the asymmetries that make it weaken more
when global markets shake and risk aversion arises. Given the
overall circumstances, we would also become more cautious if
USDCOP approaches its support references of 3,500-3,600
Falling oil prices should add another headwind for COP today. We watch 3800 in USDCOP as the first resistance area. Banrep meets on Friday, with the market expecting no change in rates.
Risk sentiment deteriorated further this morning in Europe as resurgence of virus new cases
is a growing concern and fears of new lockdowns are rising. SX5E Equity is down 2.7% led
lower by the sell-off in financials (SX7E ; -5%). In the US, SPX futures are trading 1.7% down
while Nasdaq is down 1.6%. VIX has risen by close to 4 percentage points this morning and
is trading just below the 30% handle.
Markets are waiting for developments on the Phase IV stimulus package in the US and are
lacking a catalyst in the US. In Fixed income, we remain long carry with a 34% allocation to
credit markets. In credit, we expect HY markets to outperform IG credit markets into year-end
supported by very accommodative Central Banks.
As a reminder, we recently increased our risk exposure by 4% in our portfolio, adding 2% to
our long EM hard currency exposure and initiating a long Brent exposure (on 2% of the
portfolio).
is a growing concern and fears of new lockdowns are rising. SX5E Equity is down 2.7% led
lower by the sell-off in financials (SX7E ; -5%). In the US, SPX futures are trading 1.7% down
while Nasdaq is down 1.6%. VIX has risen by close to 4 percentage points this morning and
is trading just below the 30% handle.
Markets are waiting for developments on the Phase IV stimulus package in the US and are
lacking a catalyst in the US. In Fixed income, we remain long carry with a 34% allocation to
credit markets. In credit, we expect HY markets to outperform IG credit markets into year-end
supported by very accommodative Central Banks.
As a reminder, we recently increased our risk exposure by 4% in our portfolio, adding 2% to
our long EM hard currency exposure and initiating a long Brent exposure (on 2% of the
portfolio).
The USD is stronger this morning on the back of a marked drop in risk appetite
in European and US markets. Two factors explain much of the risk aversion.
Banking shares are sharply lower following the International Consortium of
Investigative Journalists report examining bank behaviour in the context of
Suspicious Activity Reports. Travel and leisure names are weaker in Europe on the
back of continued angst around the rising COVID-19 case count in the Eurozone and
the UK. In the last couple of weeks, the USD has had a curiously fickle relationship
with equity market developments. However, this morning’s plunge in European equity
markets and futures suggesting a similarly weak open in US equities has translated
into clear USD weakness. Perhaps this reflects the USD’s supremacy when there are
big moves in risk sentiment in either direction, as we observed in a recent report
in European and US markets. Two factors explain much of the risk aversion.
Banking shares are sharply lower following the International Consortium of
Investigative Journalists report examining bank behaviour in the context of
Suspicious Activity Reports. Travel and leisure names are weaker in Europe on the
back of continued angst around the rising COVID-19 case count in the Eurozone and
the UK. In the last couple of weeks, the USD has had a curiously fickle relationship
with equity market developments. However, this morning’s plunge in European equity
markets and futures suggesting a similarly weak open in US equities has translated
into clear USD weakness. Perhaps this reflects the USD’s supremacy when there are
big moves in risk sentiment in either direction, as we observed in a recent report