Markets
Markets got some reprieve today after last week’s heavy correction amid an empty eco calendar. These conditions will remain at play throughout the week, rerouting market focus to things like US supply, central bank speeches, risk sentiment or just underlying momentum. Technical considerations come in to play as well. Core bonds drifted lower with German yields adding 3.4 bps (2-yr) to 6.5 bps (30-yr) and US yields increasing by 2.9 bps (30-yr) to 4.2 bps (5-yr). The German 10-yr yield tries to regain/retain the 2.68% neckline of a double top formation. The US 10-yr yield bounced off first support at 4.51%. European stock markets failed to build on Friday’s WS gains (up to +1.4% for Nasdaq) or this morning’s Asian rally (huge Korean outperformance on short selling ban). Key indices currently lose up to 0.5% while Wall Street opens with small gains. Brent crude bounces off the $85/b support area after Saudi Arabia and Russia confirmed their commitment to additional output cuts ($1.3mn/day combined) until the end of the year amid weakening demand and tensions in the Middle-East. The trade-weighted dollar stabilizes around the sell-off lows just above 105, but doesn’t make any additional ground, staying below the lost neckline of a triple top formation (105.55). The same goes for EUR/USD at 1.0740. USD/JPY is rising back to the 150-mark following comments by BoJ governor Ueda who signaled a low probability of ending negative rates before year-end. The likelihood of realizing the outlook for achieving the 2% price stability target is nevertheless rising, suggesting the gentle BoJ normalization path will continue. There are many ECB/Fed members scheduled to speak later this week, including ECB Lagarde and Fed Powell on Thursday, but for now we have to do with comments by former vice Fed chair and current director of the national Economic council, Brainard. She said that the US economy is coming to the point of sustainable growth with most forecasters taking recession calls off the table. EUR/GBP treads water at 0.8670. This week’s UK agenda contains a BoE Bailey speech (Thursday) and Q3 GDP data (Friday).
News & Views
The ECB in a research publication finds that large euro area companies are relocating production across the world more actively than they used to do. They’ve come to that conclusion through a survey of corporations that combined represent about 5% of the euro zone’s economic output. The respondents cited rising geopolitical risks as a driver that’s increasingly competing with traditional motivations for outsourcing that include cutting costs or improving efficiency. The pandemic and the energy crisis thereafter served as a wake-up call to the fragility of global supply chains, prompting a preference for more resilience and independence. This does not only include moving operations back into the European bloc. Companies also plan to diversify more outside the EU, for example where they source inputs. Many of them identified China as the “dominant source of critical inputs” while mentioning the country the most in terms of perceived risks.
Britain’s “big five” – the leading business groups – are calling on UK finance minister Hunt to cut business taxes, improve the power grid and address skill shortages to unlock private investment in and as such lift the economy. They are seeking, amongst others, a permanent 100% tax relief on capital spending and want the government to allow for more immigration. Hunt unveils a package of economic measures on November 22 but has downplayed expectations for big handouts with inflation still well above the 2% target. In addition, within the limited fiscal headroom he has, Hunt faces a dilemma between either heeding the group’s call (and caving to growing pressure from within the Tory party) or going for more popular initiatives such as cutting inheritance taxes. The latter should be seen against the backdrop of Hunt’s Tory party lagging Labour opposition in the polls by some 20 points. The UK has to hold general elections no later than January 2025.
