Markets
Risk aversion was name of the game last Friday as weekend uncertainty loomed over the Israeli-Hamas conflict. European stock markets lost over 1.5% with new sell-off lows for the likes of the EuroStoxx 50. Key US benchmarks shed 0.85% (Dow) to 1.5% (Nasdaq). Both the S&P 500 and Nasdaq tested the early October lows with technical pictures at risk of deteriorating further. Core bonds rallied after a week of slaughter with US yields correcting 3.4 bps (30-yr) to 9.7 bps (5-yr) lower. German yields lost 1 bp (30-yr) to 8.1 bps (2-yr). The dollar again failed to cash on the situation with the trade-weighted greenback ending at 106.07 from an open at 106.23. EUR/USD closed at 1.0594, from 1.0582. Sterling’s descent initially accelerated on the combination of disappointing and weak UK retail sales and a technical break above the 0.87 resistance area, but EUR/GBP in the end returned most of the intraday gains to close at 0.8710.
It’s back to “normal” at bond markets this morning as US Treasuries resume sell-off mode. Both the US 5-yr and 10-yr yields are attracted by the psychologic 5%-mark. The US government reported deficit data after Friday’s close showing a $1.7tn deficit by the end of September, equaling 6.3% of GDP and compared to $1.4tn or 5.4% of GDP a year earlier. Without accounting changes related to forgiveness of student loans, the deficit would have clocked in around $2tn. We stressed before that fiscal policy (twin deficits) might become the next structural market driver with central bank’s hands tied in the inflation fight and governments on a spending spree. In this respect, the US is on a worse road than Europe (expected deficits above 7% this year and next vs above 3% in EMU). It could be a factor holding back the dollar from exploiting additional gains in the traditionally beneficial context of higher real rates, rising volatility and a risk-off market setting.
The Japanese newspaper Nikkei reported this weekend that Bank of Japan officials are considering new changes to their yield curve control as domestic bond yields move higher in tandem with those in the US. The Japanese 10y bond yield sets a new high at 0.87% this morning, approaching the maximum tolerable 100 bps around the 0% BoJ-target. Earlier this month, sources suggested that inflation forecasts for fiscal years 2023 and 2024 would be increased (further) above the 2% target, providing more backing for a next gentle normalization step at the October 31 meeting. The Japanese yen could give the final push in the back. USD/JPY in illiquid Asian dealings temporarily breached the USD/JPY 150 level; generally seen as line in the sand for the BoJ. We questioned before whether FX interventions can structurally fend off the danger. Only a true (monetary) policy turn can come to JPY’s rescue.
News and views
Rating agency S&P upgraded Greece’s credit rating from BB+ to BBB- with a stable outlook, lifting the country out of junk territory back into investment grade. It’s the first of the three big rating agencies to do so since the debt crisis hit Greece more than a decade ago. Greece needs one more investment grade rating from either Moody’s or Fitch for its debt to be allowed in these particular indices. S&P hailed Greece’s budgetary consolidation which put the fiscal trajectory onto a firmly improving track while a clear mandate for the New Democracy party earlier this year allows the government to build upon past reform efforts. S&P expects the general government budget deficit to average just 0.5% over 2023-2026 with primary surpluses of (at least) 1.2% of GDP seen for this year and 2.3% over 2024-2026. Greek debt should fall to 139% of GDP by 2026, down from a 207% peak in 2020. This reflects an inflation dividend, S&P said, but it’s also due to a rapid post-pandemic expansion. Real growth is expected at 2.5% for this year while remaining “robust” in the years thereafter, in part thanks to EU fund inflows and tourism. Inflation would still average to 4% this year before easing to 2.1% in 2024-2026.
S&P kept the Italian rating unchanged at BBB with a stable outlook. The latter balances a slower budgetary consolidation against the significant economic stimulus the EU Next Gen funds should provide. Growth is projected to slow to 0.9% in 2023 and just 0.7% in 2024 before picking up to 1% again in 2025. These bleak forecasts as well as rising interest payments lead to deficits of 5.5% this year and 4.7% in 2024. The pace of government debt reduction will slow and should still amount to 132% of GDP in 2026, compared to 133% in 2023.
