OVERNIGHT NEWS
* UST 10y consolidates at 0.7817%, highest since late August, 10y US/EU swaps returns over 100bp, +35bp since April. Trump released from hospital late yesterday; fiscal stimulus discussions ongoing
* Day ahead: Lagarde, Lane and Powell speak on economy/ monetary policy, UST 3y auction, Russia CPI
* RBA keeps CRT and 3y yield target at 0.25%; reiterates highly accommodative settings will remain with high employment a national goal; AUD/USD capped by 0.7209 (50dma) ahead of FY2020/21 Budget at 10:30 CET
* German new factory orders rose 4.5% m/m in August, above f/cast, domestic orders up 1.7%, foreign +6.5%
Nikkei +0.5%, EUR 10y IRS unch at -0.22%, Brent crude +0.4% at $41.5/b, Gold -0.3% at $1,911
So far, so October: US 10y steepening up
Overnight markets were characterized by low conviction – whether yesterday’s risk rally can be sustained remains to be seen. As a reminder, CitiFX Strategy prefers to sell rallies in risk assets rather than chase corrections for now, given the number of headwinds. No surprise therefore that USD is flat – we highlight that EURUSD and USDJPY failed to achieve technical breaks around the 55d MA.
Headline risk remains high in the US. With the election just four weeks away, the topic continues to dominate. US fiscal stimulus hopes remain alive, although there has been little progress at this stage. Central bank speak is on the radar, with both Fed Chair Powell and ECB President Lagarde on the wires.
AUD is the worst performer overnight, despite rates being on hold. We think that this is to do with broader market and USD conditions than AUD outright. After all there were no negative surprises in the RBA state nor the FY21 delayed budget announcement. Finally, note that the RBI is now scheduled for Friday though INR expects no changes.
COP closed above 100d MA for the first time since May. However, our trader suspects the significant 800 level where we also find the 200d MA should cap any significant rally this week.
– Data-wise, Colombian CPI YoY came out at 0.32%MoM vs 0.12% forecast. Looking ahead, we expect monthly prints to remain low for the next few months prior to a seasonal spike at the end of the year.
El apetito por el riesgo y la debilidad del USD, una correlación que funciona por el momento El tono positivo de los mercados financieros mundiales arrastró al USD (y al JPY) ayer. Los medios especializados culpan a las expectativas de nuevos estímulos y al regreso de Donald Trump a la Casa Blanca a la hora de explicar el contexto de apetito por el riesgo, pero la verdad es que los futuros sobre renta variable estadounidense estaban al alza y el USD a la baja antes de que tuviéramos la confirmación del alta del presidente. En cuanto a las negociaciones sobre los estímulos fiscales, la presidenta de la Cámara de Representantes del Congreso Pelosi, y el secretario del Tesoro, Mnuchin participaron en otra ronda de conversaciones el lunes, pero no hubo ningún avance y se reunirán de nuevo hoy. Los estímulos llegarán tarde o temprano, porque la situación así lo exige, y no debería ser una sorpresa para nadie. La reaparición de casos de COVID-19, la disminución de los beneficios, la incertidumbre que rodea las elecciones estadounidenses y las extremas valoraciones sugieren que el apetito por el riesgo se verá limitado a corto plazo. Esto debería poner límite a la corrección del USD como se ha observado durante la sesión asiática, en la que la divisa ha tratado de recuperar algo de terreno
Las divisas LatAm se recuperan de forma desigual con el apetito por el riesgo global Cuando la renta variable se recuperó el lunes, el USD retrocedió de manera contundente, apoyando al mismo tiempo a la mayoría de las divisas LatAm. El comportamiento de las divisas LatAm fue desigual, con el petróleo superando al cobre, pero el sentimiento general mostró signos de mejora. Considerando el alto nivel de liquidez que existe todavía en este contexto, hay margen para que las divisas LatAm mantengan su tendencia positiva a muy corto plazo. No obstante, las nuevas medidas de confinamiento en todo el mundo, la volatilidad provocada por las elecciones estadounidenses y la desaceleración del crecimiento pueden perjudicar a los activos LatAm y, en última instancia, limitar los repuntes.
The USD is little changed overnight as yesterday’s “risk on” move stutters towards a modest dip in risk appetite this morning. Various explanations did the rounds yesterday as to why risk appetite was moving higher, including relief about President Trump’s health, hopes for a big fiscal stimulus under a Democrat clean sweep scenario, or relief that the election outcome might be sufficiently wide to rule out a contested result. We are most convinced by the latter suggestion, as the market had become increasingly nervous about the volatility that a bumpy election transition would bring. Today’s moribund performance might reflect some concern that a Democrat clean sweep could also bring higher taxes and sterner regulation, offsetting some of the enthusiasm from higher fiscal spending. Separately, there were no significant fresh developments on current efforts to deliver a fiscal stimulus. There are simply no big catalysts for the USD overnight, so it is suitably inert. Markets will look to Fed Chair Powell’s speech (10:40 EST) to see if it is more eventful.
Equity markets have reversed earlier gains. SX5E index is now down 0.3% led lower by the Real Estate and Health Care sectors while US equity futures are trading 0.2% lower. While equities rebounded yesterday on hopes of further fiscal stimulus in the US and on President Trump’s rapid departure from hospital, with US stocks outperforming EUR stocks, the lack of real progress on stimulus and the rise in new Covid-19 cases is mitigating risk sentiment. US 10y yields are down 2bps this morning after an 8bps increase yesterday while breakevens are holding their gains from yesterday. The move higher in the long end of the curve was helped by the risk-on move in markets and by stronger ISM services data. In FX, the DXY is marginally down this morning (-0.07%) and is 0.43% weaker since the start of the week. Ahead today Powell and the ECB’s Lane speak.
COP: The COP now has the second-largest long USD score in Latam, with its long USD score increasing by 20pp to +42%. This is in line with BanRep continuing to reduce its short USD inventory from the FX programme.