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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: GBP concern notches higher. Market prices RBA closer to zero.
John J. Hardy
Chief Macro Strategist
Summary: Sterling concern on the Brexit talks status lurched a few notches higher as the UK refuses to sit down for renewed talks until the EU makes concessions. Elsewhere, dovish jawboning overnight from an RBA official as the market shifting its expectations lower for the rate cut at the November 3 RBA meeting. Elsewhere, today is the deadline for US House Speaker Pelosi on pre-election US stimulus talks.
Trading focus:
Sterling concern notches higher on stand-off over further talks
The situation for sterling has taken a sudden turn that is finally seeing the market a bit less complacent. The prior focus was on the supposed promise brought about by changes to the controversial Internal Market Bill, key clauses of which the EU found unacceptable and would violate the Brexit withdrawal agreement. But now we have a more serious twist as the UK side refuses to sit down for new talks with the EU unless the latter makes key concession. Sterling is feeling the heat and could price in further concern here to the downside if the stand-off continues and prevents the resumption of talks. Looking over at GBPUSD, the move is still rather modest relative to a chunkier move in EURGBP, suggesting that the sterling downside thus far is still quite modest, so there is far more pain to price into sterling if the UK is willing to dig in.
Chart: EURGBP
EURGBP has jumped to attention., but the market still looks rather complacent relative to the potential risks if the UK digs in and is willing to take the situation to the wire without concession from its side. To threaten 0.9000 again, we’ll first need for talks to resume because the EU has made a sufficiently large concession to permit re-engagement. Hard to believe that the UK side will blink first. The upside potential is considerable in range terms, but may prove capped untill/unless the market is sure that a no deal is in the cards.
Aussie bashed further on more RBA jawboning
The Aussie sell-off had stalled a bit yesterday and the currency was only dragged a bit lower later in the session on an ugly late session in US equities before more RBA jawboning overnight dragged the currency a bit lower still. The RBA’s Kent claimed in an interview that there is further room to “compress” rates and said he wouldn’t be surprised if the shortest rates dipped below zero at some point. This has the market pricing nearly zero rates at the November RBA meeting (implied rate at 4.4 bps – so some seeing a cut from the current 0.25% to 0.10% while others lean for a full ZIRP.) Were the Chinese yuan not setting nearly daily highs against the US dollar, the AUD would surely be lower – it is definitely a factor in the mix.
US stimulus deadline supposedly up today.
Not much to add on the US stimulus front save for the fact that a definitive headline either way may be on the way and move markets considerably over the next 12-18 hours (today is House Speaker Pelosi’s deadline for a deal if something to be passed before the election). The most confusing aspect is perhaps less whether House Speaker Pelosi and Treasury Secretary Mnuchin can come to terms, but more whether Senate Republicans are willing to sign for a larger deal Trump seems willing to do as they may be burning bridges to Trump in anticipation of a thumping for their party at the election. A no-go on stimulus ´would likely support the USD and JPY and weaken risk sentiment.
Euro resilience despite ugly Covid-19 news flow.
The firm euro today is a tough one to wrap our heads around unless it is the news of the massive interest in the first proper join EU bond issue, which was said to be massively over-subscribed today. On the negative side, Covid-19 numbers in Europe are terrible as we await the flash PMI numbers for October on Friday. New virus-linked restrictions include a total shutdown in Ireland at the highest Level 5 severity, with people essentially told to shelter in place. German Bund yields have been driven to their lowest level in recent days since the worst week around the March Covid-19 linked market meltdown.
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