Battered market licks wounds ahead of US GDP, ECB, big Tech earnings

29th October 2020 – Macro Daily

Market Update

Markets are this morning in a more positive mood, with risk assets broadly paring back some of yesterday’s steep losses, despite both France and Germany confirming earlier rumours that both countries will be heading into national lockdowns imminently. The Stoxx 600 trades higher by around 0.5%, while S&P 500 futures are up 1.0%, ahead of a key events including US Q3 GDP, an ECB rate decision and a busy slate of earnings including from the likes of Tech heavy weights Alphabet, Amazon, Facebook and Apple, who are all reporting after the US close and have a combined market capitalisation of the Nasdaq 100 of 36%. Other asset classes are somewhat more mixed/subdued; USD marginally firmer, crude oil markets are very marginally lower, while US yields are broadly a tad lower.

Some off the move higher in equities is likely being driven by a combination of profit taking and position adjustment following yesterday’s bloodbath (the S&P 500 closed more than 3% lower), whilst positive news on the Covid-19 front is also being attributed as supportive for risk appetite; Regeneron’s Covid-19 treatment trail met it primary and secondary end-points, resulted in a significant hospitalisation rate and was well-tolerated by patients. Meanwhile, trail data from Eli Lily on its Bamlanivimab treatment showed that it might be effective in reducing symptoms and hospitalisations in infected patients.

G10 FX

AUD, NZD, CAD and GBP are the best performers, amid the pick-up in global equities. AUDUSD is back above 0.7050, USDCAD back below 1.3300 and NZDUSD back to the 0.6650 mark, having broadly shrugged off strong NBNZ Business Confidence survey data for October, which rose to -15.7% from -28.5% in September, while the NBNZ Activity Outlook rose to 4.7% from -5.4%. Meanwhile, GBPUSD continues to trade around 1.3000, as the cross continues to feel the tailwinds from a more positive tone on Brexit that lifted it off lows close to 1.29000 yesterday; as a reminder, Bloomberg was told by its sources close to EU/UK trade discussions that progress was made on key issues, making a November deal more likely.

All four currencies trade off highs amid a recent uptick in USD which has taken DXY back to 93.50 and also lifted JPY slightly. Recent minor USD strength has sent mainland European currencies into negative territory; EURUSD is has slipped around 0.1%, back from the 1.1750 mark to the 1.1730s, CHF is also lower on the day by around 0.1% and NOK and SEK are the underperformers, each lower vs USD by over 0.2%. Traders are bracing themselves for today’s ECB meeting (will Lagarde tee up an expansion to the PEPP) and preliminary German CPI numbers for October. JPY, meanwhile, was broadly unaffected by last night’s BoJ interest rate decision, where the bank kept policy on hold as expected (interest rate at -0.1% and 10-year JGB targeted at 0%), as well as soft retail sales data for September that saw a surprise M/M contraction of -0.1% (exp. +1.0%).

The Day Ahead

0855GMT/0455EDT, German Labour Market Report (Oct)… German unemployment change is expected to come in at -5k in October, with the unemployment rate seen unchanged at 6.3%.

1230GMT/0830EDT, US Annualized Q3 GDP, Weekly Jobless Claims… GDP fell at a staggering 31.4% annualized rate during Q2, with the drop in economic activity as a direct result of the stay-at home orders issued/businesses closures that were enacted across the country in response to the Covid-19 pandemic. The virus continued to spread throughout summer and into the Autumn, with the country seeing a second wave in the South and West, and now experiencing a third wave in the Mid-West. However, the US economy has largely reopened, resulting in an improvement in economic conditions. Wells Fargo “estimate that real GDP expanded at a 28.6% annualized rate in Q3. Stimulus checks and expanded unemployment benefits have significantly boosted household incomes, which likely fuelled a rapid recovery in consumer durable goods spending.” Turning to weekly jobless claims numbers; initial jobless claims dropped below 800k for the first time since the onset of the pandemic last week and are seen coming in at 775k today, but remain persistently high in October and consistent with the notion that improvements in the labour market in the US have slowed in October.

1245GMT/0845EDT, ECB Rate Decision, 1330GMT/0930EDT, Press Conference… Markets don’t expect any new policy announcements at the October ECB meeting. However, most analysts expect a dovish slant to the meeting, with the ECB teeing up an increase to the PEPP whilst acknowledging growing risks to the growth and inflation outlook on the back of rising Covid-19 cases and regional lockdown measures. We look for Lagarde to leave the door wide open to augmenting the PEPP in December, which most analysts are now expecting. Consensus expectations are currently for a EUR 500bln expansion to the PEPP in December.

1300GMT/0900EDT, German CPI (Oct Prelim)

1400GMT/1000EDT, US New Home Sales (Sep)

2245GMT/1845EDT, NZ Building Consents

2350GMT/1950EDT, Japanese Industrial Production (Sep)

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