Spain continues to set the tone in the European financial market

Market movers today

• Today, markets will focus on the US jobs report for September. We estimate jobs growth slowed to 90,000 in September due to hurricanes, so it does not change our view that the underlying st rength of the labour market is st rong. We expect markets to look mainly at average hourly earnings and not so much non-farm payrolls. This is also what the Fed signalled at the latest meet ing, as the statement explicit ly said that the Fed will look through short -term weakness due to hurricanes.

• We also have a few Fed speeches in the afternoon, most notably we are due to hear from Dudley (voter, neut ral) at 18:15 CET.

• In Germany, we get factory orders for August at 08:00. We est imate they rose 0.5% m/m after the 0.7% decline in July, as the European manufacturing cycle seems st rong.

• In Norway, product ion data for August are due today also at 08:00 CET. In Sweden, we get budget balance data for September. See Scandi sect ion on page 2.

Selected market news

Spain continues to set the tone in the European financial market. However, for the first time this week the sentiment improved yesterday. 10Y government bonds yields recovered almost half of this week's underperformance wit h an 8bp tight ening versus Germany and the IBEX 35 rose 2.5%.

There were several triggers for the sudden turnaround in sentiment . The Spanish government bond auction in the morning at tracted good demand especially for the new 5Y bond. Hence, despite the polit ical jit ters the higher Spanish yields were able to at t ract investors. On the polit ical side, Spain's const itut ional court suspended a plenary session call for Monday in the Catalan parliament , which might have started a 48-hour countdown to a formal declaration of secession and ‘ret aliat ion' in respect of Madrid using art icle 155 in t he constitution t o t ake away power from the local Catalan Parliament . Apparently, Catalan leaders were also looking at how to put off or at least delay an official declarat ion of independence to make for t ime for further negot iat ions with Madrid. The media also reported that Catalan leaders are divided. Finally, the decision by Banco Sabadell to move its headquarters to Alicante underlined that independence could be cost ly. It seems that the Spanish crisis has peaked for now. However, there is a risk st ill that the situat ion could spiral out of cont rol next week and independence is called. The small rat ing agency DBRS has Spain up for review tonight and the market will scrutinise the message to see if the political jitters means that the posit ive rating cycle in Spain has stalled for now.

The ECB minutes from yesterday supported the view that any QE tapering will be very gradual.

The US equity market cont inued the positive October momentum and S&P500 closed for the seventh day with a new all-time high. Positive surprises in durable goods orders and factory orders supported sentiment . The appointment of Randal Quarles to the Fed board of governors with responsibility of financial regulat ion also supported sentiment especially for financial stocks. Quarles is in general seen in favour of ruling back US regulation.

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