Markets
The rejected tests of the psychologic 5% mark in the US 5-yr and 10-yr yields yesterday had their technical consequences today. In absence of economic data on both sides of the Atlantic and with Fed Chair Powell closing the curtain on the early November policy meeting, core bonds got some breathing space. Especially since genuine risk aversion is today’s main trading theme. Key European stock markets lose up to 1.5% for the German Dax. The EuroStoxx 50 sets a new sell-off low at 4040 with the YTD low at 3980 coming narrowly close. If any, the index is clearly in a sell-op-upticks pattern. The dollar fails to really cash on the situation with EUR/USD near opening levels at 1.0585 and USD/JPY fighting to live another day below 150. Gold rallies to its highest level since early August, trading just shy of $2000/ounce. Daily changes on the US yield curve range between -3.9 bps (3-yr) and +1 bp (30-yr). German yields trade between -5.9 bps lower (2-yr) and 2.3 bps higher (30-yr). The front end outperforms in the run-up to next week’s ECB meeting where the central bank is widely expected to skip on a rate hike, buying time to assess the data by the December policy update. Most ECB-members keep a very open approach (stable rates or higher) between now and March of next year. Only then, it might be (at the earliest) possible for them to firmly conclude that the disinflationary process is on track to meet the 2% inflation target on a sustainable basis. Despite the status quo, deliberations on making monetary policy more restrictive via extracting excess liquidity remain ongoing. More specifically, the central bank is looking into ending its reinvestment policy from its Pandemic Emergency Purchase Programme ahead of the currently flagged end of 2024. The Italian 10yr yield spread vs Germany widens marginally (+1 bp to 203 bps) ahead of tonight’s S&P rating update. The rating agency currently applies a BBB rating with a stable outlook. While a downgrade will likely be avoided, S&P might apply a negative outlook given deteriorating public finances. In coming weeks, Fitch (Nov 10) and Moody’s (Nov 17) give updates as well. Fitch holds a similar rating as S&P for the moment, while the Italian rating is already the lowest investment-grade rating at Moody’s (Baa3) including a negative outlook. It’s of the utmost importance for the country(‘s debt) to avoid a drop into junk territory. UK Gilts are well-bid as well this morning with the front end of the curve even outperforming Europe. UK Gilt yields fall by up to 8 bps (2-yr) this morning after weak UK retail sales round up this week’s economic update following dismal, but incomplete labour market figures and broadly in-line inflation data. They suggest a firm hold by the Bank of England even as the economy likely needs a firmer monetary policy to battle inflation. The other side of the medal is an outperformance at the very long end of the curve (30-yr +6 bps; testing last year’s high at 5.14%) through rising inflation expectations. EUR/GBP broke through the 0.87 resistance area (July & September high + 200d mavg).
News & Views
The monthly consumer survey of the National Bank of Belgium showed consumer sentiment unchanged at -5. After last month’s dip, saving intentions climbed significantly in October. Household confidence in the macroeconomic picture for the next twelve months slipped back to the level seen in August (-17 from -13). Households also expressed greater concern over future developments in the labour market (unemployment index from 12 to 15). On a personal level, households s revised their saving intentions upwards (13 from 7). Expectations for their own financial situation remained unchanged from last month. This month’s survey was completed just prior to these terrorist attack in Brussels on 16 October, which, may influence the survey results.
The Chinese Ministry of Commerce today announced that it will require export permits for some graphite products that are used in batteries for electric vehicles. China is the biggest world producer and exporter of the materials. The Ministry said that the measure was “conducive to ensuring the security and stability of the global supply chain and industrial chain, and conducive to better safeguarding national security and interests”. The move comes a few days after the US also announced controls on exports to China of AI-related ships. China said that the measure isn’t targeting any specific country. Aside from the US, mostly Asian countries including South Korean and Japan are importing graphite products from China.
