Risk-off mode in play; investors ponder the impact of new economic restrictions

Markets

Yesterday started in outright risk-off modus especially on European markets. The sharp rise in virus infections made investors ponder the impact of new economic restrictions. It is also unclear how much firepower monetary and fiscal authorities still have to mitigate the impact of a next corona wave. European equity indices showed losses of up to 3%, but the intensity of the risk-off eased going into US dealings. We didn't see a clear reason for the improving US sentiment. US data were mixed, with the jobless claims showing an unexpected upswing. US COVID developments aren't comforting. The debate on US stimulus continues to linger, but discord in the Republican party between US president Trump, supporting a big package, and some senators advocating much more modest support, doesn't make things easier. Whatever the driver, US indices rebounded to close with only modest losses. The easing of tensions also caused US yields to reverse an initial flattening, even closing marginally higher. European yields maintained a big part of the intraday flattening with yields declining between 2.3 bps (2-y) and 4.1 bps (30-y). The German 10-y yield exactly closed at -0.61% support. 10-y intra-EMU spreads widening by up to 8 bps (Greece).

The dollar followed the standard risk-off reaction function but the reaction was very orderly. The US currency gained ground early in the session, but didn't clear any important technical level. At the same time, it later kept most intraday gains, even as the risk-off eased. EUR/USD closed at 1.1708 from 1.1746 at the open. The TW dollar (DXY) finished near 93.80. USD/JPY gained some ground, but this occurred later (when sentiment improved) to close at 105.45. Sterling lost modest ground against the euro (EUR/GBP 0.9070) as markets awaited a clear signal from the EU summit and/or any indication that the UK would be prepared to continue talks. CE currencies (HUF PLN) were hit hard and didn't profit (yet?) from the easing of tensions later in US dealings.

Asian equity markets mostly show modest losses this morning with China slightly outperforming. The yuan is trading little changed (USD/CNY 6.72 area). For now, the dollar maintains most of yesterday's gain with EUR/USD struggling not to fall back below the 1.17 handle.

The US eco calendar is well filled with the retails sales, production data and U. of Michigan consumer confidence. Markets ignored eco data recently. We assume markets to be more sensitive to bad news than to good news. Markets will also keep a close eye whether the EU summit will convince UK PM Johnson to continue Brexit talks over the next 2/3 weeks. We expect global sentiment to remain fragile as the US election comes closer. In this context, the dollar probably might retain the benefit of the doubt, but we don't expect a big leap higher (EUR/USD to hold north of 1.1612) We stay cautions on sterling as the tactical/political fight between the EU and the UK might still continue. On the interest rate markets we look out on which side of the -0.61% barrier the German 10-y yield will close.

News Headlines

A big study sponsored by the WHO showed discovered that Gilead Sciences' COVID-medicine Remdisivir failed to prevent deaths. It drew conclusions from a trial covering 11k people in 30 countries. The news arrives after AstraZeneca, J&J and Eli Lilly all had to stop/pause clinical trials in search of a vaccine as well.

US President Trump threatened Europe over the WTO ruling that allowed the old continent to hit the US with $4bn of tariffs because of illegal US aid to Boeing. Trump said: "if they strike back, then we'll strike much harder. They don't want to do anything. I can tell you that". The EU made up a list of products in scope, but wants to wait the outcome of the presidential election. Earlier this year, the WTO ruled that the US could impose $7.5bn tariffs on EU goods because of similar state support to Airbus.

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