Risk rally pauses for breath

13th October 2020 – Macro Daily

Risk Appetite

After yesterday’s impressive rally on Wall Street, sentiment is a little more risk off this morning, with a majority of the haven inflows/risk asset outflows coming in the immediate aftermath of the reopen of US cash treasury trade; at the time (shortly after mid-night), USD rallied against all of its major G10 counterparts, with NOK, AUD, EUR and GBP the worst hit, while global equities also slipped, although most assets have now pared back the majority of these losses. Nonetheless, S&P 500 futures trade around 0.4% lower this morning, the Stoxx 600 is down about 0.2%, US treasury yields are lower (and the curve flatter) and USD continues to lead the gains in the G10.

As to why we are a little more risk off this morning; no particular piece of news seems to have spurred the slightly more cautious flows. Admittedly, Johnson & Johnson did announce a pause to their Covid-19 study due to an “unexplained illness in a participant”, but they explained that this is a normal part of any large clinical study.More likely, markets are taking the opportunity to reassess/take profit after nearly a week of pretty much none stop risk on flows (in equity markets at least), as they await further clarity on key themes such as the US economy (we get some important data points this week), the US political circus, Brexit and the spread of the virus.

G10 FX

As noted, USD has been on the front foot since the start of the overnight session given an increased demand for havens; DXY has rebounded from support at the psychological 93.00 handle back to above 93.20, though it remains contained by the 50dma at 93.26 for now. Above that, 93.34 ought to be the next significant area of resistance (October 6th lows).

NOK, AUD, GBP and EUR are the worst performers this morning. Starting with the latter two currencies; EURUSD is now below the 1.1800 level and GBPUSD is back below 1.3050, both trading as a function of USD strength. With $2.5bln in option expiries rolling off at today’s NY cut at EURUSD’s 1.1800 handle, the round number might prove tougher resistance than is usually the case.

In terms of Eurozone fundamentals; though EUR did not react to the release of this story yesterday evening, suggestions from ECB sources yesterday that several ECB policymakers are reluctant to go down the same road as the Fed with average inflation targeting, given fears that it might “tie their hands” and “create unrealistic expectations” (indicative of further disunity on the Governing Council) might be weighing on the single currency. Remember, over the weekend, ECB Chief Economist Lane hinted strongly that the ECB might adopt such a policy, saying the ECB might let inflation overshoot and would pursue its inflation target as aggressively as the Fed.

Meanwhile, GBP seems to have largely shrugged off the August UK labour market report, which remains difficult to interpret given the distortive effect of the UK’s furlough scheme, which continued to pay up to 60% of employee wages in August. The unemployment rate rose to 4.5%, higher than expectations for 4.3%, while three-month employment change came in at -153k jobs, significantly worse than expectations for job losses of just 30k in the June-August period. However, the rise in unemployment benefits claimants in September was just 28k, lower than expectations for a rise of 78.8k. Consensus thinking remains that the worst is yet to come for the UK labour market, with things set to get ugly in Q4 as the UK government significantly winds down its furlough scheme – from October, it will only be paying up to 2/3rds of the wages of those who work for businesses that have been ordered to shut due to lockdown restrictions (i.e. hospitality).

Turning to AUD; knee jerk strength in USD shortly after midnight saw AUDUSD slump below the 0.7200 level and below its 21dma which currently at 0.7180, although much of this move has now reversed. The next area of significant support is all the way down at the psychological 0.7100 level (last week’s low and $1bln in option expiries for today’s NY cut).

Strong Chinese trade numbers were unable to lift the mood for AUD, although they have seemingly helped CNY; USDCNH is flat on the day just above 6.7400 despite the stronger dollar. China’s trade surplus was over $20bln less than expected at $37bln in the month of September, driver by a surge in imports. Imports were up 13.2% Y/Y in September vs expectations for an annual growth rate of just 0.3%. This included strong growth in imports of a number of key Australian exports including copper (imports grew to 772.5k tonnes from last month’s 668.5k) and iron (imports grew to 108.6mln tonnes from last month’s 100.36mln. Measured in yuan, imports hit record highs in September.

NZD is holding up much better than its antipodean counterpart and is an outperformer on the day alongside USD; NZDUSD trades nearly 0.2% on the day close to 0.6660, having fully recouped overnight losses that took the cross as low as 0.6630; the 21 and 50dmas both sit in the mid-0.6630s and seem to have acted as support. I haven’t seen any specific New Zealand fundamentals to explain its outperformance this morning, but some are suggesting that selling in AUDNZD (that has pushed the cross below its 21dma at 1.0820 and the 1.0800 handle) is supporting the currency.

Looking elsewhere, SEK, CHF and CAD are trade marginally lower vs USD; Swedish inflation numbers for September were soft at 0.4% Y/Y (exp. 0.6%) and 0.1% M/M (exp. 0.3%), but seem not to have had too much of a lasting impact on SEK; EURSEK trades at the bottom of its recent 10.3700-10.4100 intra-day range. Meanwhile, USDCAD managed to keep overnight gains contained below 1.3150, with a test of the 1.3100 handle seeming increasingly likely. USDJPY is back above its 21dma (at 105.36) and trades just below 105.50.

Finally, the stronger USD is keeping JPY on the back foot despite the broadly risk off market tone and reports that Japanese PM Suga is considering an extension of additional economic measures in November.

The Day Ahead

0935BST/0435EDT, Norges Bank Deputy Governors Wolden Bache and Nicolaisen give speeches for Regional Network Inland at Hamar.

1000BST/0500EDT, German/Eurozone ZEW Report (Oct)… ZEW Economic Sentiment is expected to have fallen in Germany to 73.0 from last month’s 77.4 reading. Despite the expected decline, the index would still remain close to historical highs. SEB think that “the large difference between the ZEW and other indicators such as PMI and IFO resembles the development in 2009… mirroring the views derived from equities that long ago have pencilled in a rather short drop-in economic activity.” SEB urge greater degrees of caution “as the recovery process in real economic terms is likely to be gradual and that the current crisis ought to leave some marks on economic activity for a longer period of time.”

1100BST/0600EDT, US NFIB Small Business Optimism (Sep)… Small business optimism rose in August back to above 100 for only the second time since Covid-19 struck the US economy back in March. Optimism is yet to recover back to pre-Covid-19 levels which were closer to 105. Wells Fargo think that it will be interesting to watch this index given that we are now in the throes of election season; “the survey respondents, who lean disproportionately Republican, should offer some insight on how small business owners are digesting the ongoing presidential election. During the 2016 election, the index saw a record two-month jump from October to December.”

1200BST/0700EDT, OPEC Monthly Report

1200BST/0700EDT, ECB’s Knot holds a press conference for the presentation of biannual Dutch financial stability report.

1330BST/0830EDT, US Consumer Price Inflation (Sep)…

TD Securities view Covid-19 as disinflationary, on balance, but with positive as well as negative effects, which they think will be evident once again in today’s September CPI numbers; for example, they “expect strength in used vehicle prices to lead to an above-trend 0.3% rise in the core index, but with an unwinding of earlier strength in food-at-home prices helping hold the rise in the overall CPI to 0.2%.” “Core as well as headline inflation has slowed, on balance, since early 2020” TD continues, “and we expect net slowing to be sustained amidst ample slack.” Markets expect M/M Core CPI to ease to 0.2% but the Y/Y rate to nudging higher to 1.8%. As a reminder, the Fed looks at Core PCE, which is normally around 0.3-0.4% lower than CPI, thus, today’s CPI prints are expected to remain well below where the Fed wants them to be (if the Fed wants Core PCE sustainably above 2%, then CPI will need to be sustainably above 2.3-2.4%).

1330BST/0830EDT, Norges Bank Governor Olsen gives a speech at the conference Norway Summit in Stavanger.

1330BST/0830EDT, European Parliament President Sassoli holds a video conference with EU lawmakers leading talks on the next EU budget and recovery fund.

1500BST/1000EDT, Bank of England Governor Bailey gives evidence on unemployment and COVID at a hearing before the House of Lords Economic Affairs Committee.

1600BST/1100EDT, Riksbank Governor Ingves participates in a panel discussion on the future of the payment market and how digital means of payment issued by central banks (CBDCs) may affect commercial banks and monetary policy.

1900BST/1400EDT, US Federal Budget Balance (Sep)

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