Can weak PMIs cloud the glass-half-full view of markets?

Market movers today

Today focus is on the release of October flash PMIs for the euro area (including Germany and France), the UK and the US.

There will also be focus on how Trump and Biden were perceived in the presidential debate overnight and whether the new Brexit talks will lead to a deal anytime soon.

The 60 second overview

Weak PMIs today - but how weak? The euro area service index disappointed in September, as the index fell below the 50 threshold again, indicating a decline in service activity. The uncertainty is whether October will look any better, with COVID-19 restrictions tightening further since the September report, as new cases have accelerated in several European countries. We expect the US indices to remain above 50. Absent further progress on a fiscal deal in the US or Brexit, we could see EUR/USD drop back below 1.18 today on a downbeat reading of flash PMIs. We see risks in SEK being tilted to the downside versus EUR and USD, not least given increasing doubts regarding the recovery.

Risk of second lockdowns is increasing. Politicians have started to tighten restrictions and since new cases have not come down, the bias is towards tighter restrictions at the moment. Despite the high economic costs of imposing strict nationwide lockdowns, some of the smaller European countries have already gone so far (Wales, Ireland and the Czech Republic) and the discussions have re-emerged in many other countries.

ECB. At next week's ECB policy meeting, we do not expect any new measures to be announced. However, with the COVID-19 spreading increasing, we expect the ECB to send its usual dovish signals. Our baseline is for the ECB to signal a readiness to act subject to incoming data in the coming six weeks and not a pre-commitment to expand already next week.

Turkey leaves rates unchanged. Turkey unexpectedly left the 1-week repo rate unchanged at 10.25%. Analysts' expectations varied from unchanged to +300bp (Danske +200bp). Once again, the central bank sees the inflation outlook in a much brighter light than e.g. us. At worst, TRY had dropped 2.5% versus USD. This move should also be seen in the light that many commentators have been out favouring TRY strength in anticipation of more rate hikes, though, and as such, the market was likely caught on the wrong foot. Although the Lira remains quite fragile on the back of this, we are not expecting a balance of payment crisis or similar extreme outcomes.

Equities. Headline indices continue to move fairly sideways, notably in Europe.

FI. Yesterday markets in European rates were relatively calm amid a sell-off by 2bp across the jurisdictions, in a bearish steepener move. Italian bond supply in the 30y segment underperformed peers. The sell-off was also driven by Pelosi saying that a stimulus deal is 'just above there'. We expect more range trading ahead of the ECB meeting next week.

FX. The rally in EUR/USD ended yesterday and we could see a drop below 1.18 today on poor flash PMIs. EUR/GBP remains a range play until further progress is made in Brexit talks. Scandies still look vulnerable in the current risk environment.

Credit. Yet another day of relatively small moves in credit markets where iTraxx Xover widened 6bp and Main 1bp. Once again, cash bonds did better and were largely unchanged for the day.

Nordic macro and markets

The work on alternative reference rates is a topic that will attract increasing attention over the coming year. In yesterday's Reading the Markets we give a quick summary on the work so far done in Norway.