ECB comments have more potential market moving impact

Markets 

The post-Fed surge in core bond yields was confirmed in Friday’s close. (Bond) markets couldn’t profit from the more fragile risk environment. The German 10-yr yield is on track to completely reverse the Summer decline after marching north of -0.25% (62% retracement May/August retreat). The final intermediate target ahead of the YTD high (-0.07%) stands at -0.15% (June high). The US 10-yr yield finally waved goodbye to 1.37% resistance (38% retracement on March/July decline). The next important mark is 1.53% (62% retracement on that same move). We stick with our upward bias for long term bond yields medium term. EUR/USD already ran into trouble near 1.1750 even as German (real) rates outpaced US ones (in a catch-up move). The approaching German election and European stock markets 1% losses probably had an impact. Sterling’s post-BoE rally only lasted for one day with EUR/GBP closing the week in familiar territory at 0.8571.

Asian stock markets are mixed this morning while most commodity and especially energy-related prices resume their increase. The CDU/CSU’s better than expected performance in German elections delivers a stalemate with the SPD, making it at this stage impossible to call what the next government will look like. The political deadlock translates into market inactivity with EUR/USD going nowhere at 1.1720. The Bund is a tad stronger compared with Friday’s closing levels. General risk sentiment will set the tone for trading today given the thin calendar. Eco data are confined to August US durable goods orders and EMU M3 money supply data. The Belgian debt agency aims to raise €3-3.5bn by tapping OLO 92 (0% 2031), OLO 84 (1.45% Jun2037) and OLO 88 (1.7% Jun2050). Year-to-date, the debt agency already raised €30.63bn via medium/long term funding compared with a €36.41bn funding goal. Speeches by central bankers serve as a wildcard today, but also during the remainder of the week. Fed Evans, Williams and Brainard line up and could provide some additional details on last week’s Fed meeting when the central bank gave the go-ahead for a near term start to tapering. ECB Lagarde appears in a hearing before EU parliament. From tomorrow, eyes turn to the Portuguese Sintra where the ECB forum on central banking starts. The topic is “Beyond the pandemic: the future of monetary policy”. It serves as a potential platform to soft sound how 2022 ECB policy could look like. From a market point-of-view, we think that ECB comments have more potential market moving impact since the Fed last week more or less spelled out policy for the next 9 months.

News headlines

German Social Democrats of Olaf Scholz secured a small lead (25.7%; estimated 206 seats) over the CDU (24.1%; estimated 196 seats) in this weekend’s parliamentary elections. Even so, SPD Leader Scholtz and CDU leader Armin Laschet both indicated they intend take the lead in forming a new government. The Greens become third in the election with about 14.8% of the votes (118 seats). The Liberal Free Democrates are fourth with 11.5% (92 seats). Both the SPD and the CDU currently are not in favour of a repeating the Grand collation. In this scenario, both the parties probably face long negations to form a three party coalition with the Greens and the FDP. A left-left-Green collation with the Left, the SPD and the Greens probably won’t reach a majority in Parliament. It might take months for coalition talks to be concluded and translate into an agreement to form a government.

Rating agency Moody’s upgraded the Long-Term credit rating of Hungary from Baa3 to Baa2. The outlook on the new credit rating was put at neutral from positive previously. Moody's said the projected strong growth rebound and medium-term outlook over the coming years will "support fiscal consolidation and reduction in the government's debt burden". The rating agency sees potential growth at around 3-4% over the next five years. The rating agency expects the debt-to GDP ratio to decline almost 4 ppt between 2020 and 2023 to a projected 76.7% of GDP.

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