Investors still have to navigate through multiple conflicting topics. Uncertainty on financial stability in China doesn’t abate as Evergrande apparently isn’t the only real estate developer failing to meet debt obligations (Fantasia). This kept Asian markets in risk-off mode. Surprisingly, European equities took a different view and saw the glass half full rather than half empty. A bit contra-intuitively, the European risk rebound was driven by energy/inflation sensitive sectors (energy, utilities & financials) as they profited from a further rise in oil/energy prices. Brent Oil ($82.5 p/b) extends its post-OPEC rebound, reaching the highest level in 3-years. EMU 10-y inflation swaps expectations (1.99%) are only a whisker away from 2.0% mark. An energy driven rise in inflation for sure won’t be a blessing for the EMU economy going forward. However at least today, that didn’t hold up. European equities regain between 0.5% and 1.0% on average. US indices open 0.5% higher. The sharp rise in inflation expectations still hardly moved core European yields (changes of less than 0.5 bp across the curve). Despite broader market uncertainty, intra-EMU-spreads versus Germany also remain a place of remarkable calm. US yields are rising up to 2.25 bp (5 & 10-y) also driven by higher inflation expectations. Eco data were second tier and largely ignored. After finishing this report, the US non-manufacturing ISM still has market moving potential. A modest decline to a still lofty 59.9 is expected. Markets will keep a close eye to what extend price rises might become an obstacle for this sector, too.
No outspoken, unequivocal trends in the major currency cross rates today. The dollar gains modestly and tries to regain the 94 mark. A record US trade deficit (goods and services, cf infra) at $73.3 bln currently is no issue. The yen underperforms (USD/JPY 111.35), suffering from the risk-on and higher oil prices. The euro (EUR/USD 1.159) also continues fighting an uphill battle despite the risk rebound. The 1.16 is a high hurdle and key support at 1.1563 stays within reach. The Norwegian krone remains a prominent beneficiary of the jump in oil prices with EUR/NOK testing the 9.90 support. Gains in the likes of the loonie (USD/CAD 1.259) remain more modest. The inflation-related risk-on also favours sterling over de euro (EUR/GBP 0.8520).
Romanian PM Citu and his Liberal government didn’t survive a no-confidence vote in parliament. The motion was tabled after former coalition partner USR Plus linked up with opposition parties on the left (Social Democrats) and on the extreme right (AUR). Romanian president Iohannis will now decide on the next step with possibilities ranging between installing an interim cabinet, proposing a new Liberal PM who could try to form a new government or appointing a technocratic government targeting snap elections. Romania holds the lowest possible investment grade rating at the three major rating agencies with both Moody’s and Fitch attributing a negative outlook. They warned that the collapse of the government might complicate necessary fiscal consolidation efforts. The political crisis and the raging Covid-pandemic (highest daily infections on record with second-lowest EU vaccination rate) didn’t hold the central bank back from unexpectedly hiking the policy rate today from 1.25% to 1.50%. Governor Isarescu stroke a hawkish tone pointing to risks from significantly higher inflation short term (5.6% expected by year-end) resulting from supply-side shocks. The Romanian leu barely recovered from recent weakness with EUR/RON still trading near the all-time high of 4.9550.
The US trade deficit widened to a record $73.3bn in August. According to the Commerce Department, import rose by 1.4% m/m (to $287bn) while exports were up only 0.5% m/m (to $213.7bn). The higher imports reflected both shipments of consumer goods and industrial supplies by business customers. Supply-side bottlenecks remain an issue as witnessed for example by declining exports and imports of vehicles and parts.