The rebound seen over the last couple of days appears to be being driven by a sharp fall in bond yields, at least in European markets, with the sharp drop in UK gilt yields marking the unwind in premium that we saw in the aftermath of the market turmoil post the UK mini-budget.
Markets are hoping that the coronation of Rishi Sunak as the next UK prime minister will help draw a line under the events of recent days, as the PM-elect warned his party that they needed to unite or die. This may prove to be a tall order given the Tories propensity for fratricide over the years.
Given recent events, it’s likely that the old divisions may well reassert themselves in the coming days, as things settle down, or if the polls don’t improve, and it would be quite something to see an immediate rebound in the government’s political fortunes.
The fall in UK gilt yields does suggest one thing, and that is we will probably see a Budget delivered next week, and all the indications are it will be delivered by Jeremy Hunt, the existing chancellor. It would be highly unsettling for markets if Hunt was removed this close to Monday’s Budget, but given the Tories recent habit for shooting themselves in the foot, anything is possible.
While gilt yields fell back, the pound struggled for gains, largely on the basis that the economic outlook for the UK economy remains grim, and any new measures that are announced in next week’s Budget are unlikely to improve that. Nonetheless, UK 2-year yields are now back at levels last seen on the 22 September just prior to the mini-budget, after posting the biggest daily drop in yields in 30 years.
That said, the outlook growth in Europe looks little better after the latest flash PMI numbers showed economic activity contracted for the fourth month in a row, with manufacturing getting hit the hardest, although services fared little better. Energy-intensive industries fared the worst on the back of surging energy prices, as the cost of reliance on cheap Russian gas became ever starker.
US markets also underwent another positive session in what is set to be a big week for tech earnings, starting with Microsoft as well as Google owner Alphabet later today. The rebound in US markets appears to be being driven by an expectation that we may be close to a pause in the current pace of Fed rate rises, while US treasury secretary Janet Yellen said that she can’t rule out the risk of a recession. That said, the continued resilience in US treasury yields suggests that bond markets have their doubts about a pause, and that the Fed will probably push its luck until something snaps.
With Federal Reserve officials now officially in a quiet period in the lead-up to next week’s meeting, there is little prospect of any sort of pushback on this belief. Let’s hope that markets aren’t getting ahead of themselves and indulging in a spot of wishful thinking.
On the data front its set to be a fairly quiet day, with the latest Germany IFO Business climate survey for October, along with US consumer confidence for the same month, both of which are expected to come in softer. October is expected to see continued softening in German business sentiment, with a further softening of the current assessment as well as expectations. Business climate is expected to fall to 83.5, while expectations are expected to fall to 75 from 75.2. In the US, consumer confidence in October is expected to see a modest decline to 106 from 108.
EUR/USD – continues to edge higher with the 50-day SMA at 0.9900, acting as resistance along with trend line resistance from the highs earlier this year, which currently come in at the 0.9940 area. While below these key levels, the bias remains for further losses towards 0.9000, while below 1.0000.
GBP/USD – slipped back from the 1.1440 area and the 50-day SMA yesterday. This is a key resistance area, with the bias for further weakness towards the Friday lows at 1.1060. A move below 1.0920 opens up a return to the 1.0800 area.
EUR/GBP – continues to find buyers on dips but still has resistance at the 0.8780 area. Still have support at the 0.8570 level and 100-day SMA. A break of 0.8650 and the 50-day SMA, could well signal further declines towards 0.8490 and the 200-day SMA.
USD/JPY – despite reports of fresh intervention yesterday the US dollar bounced back from lows of 145.49. It is currently finding it difficult to get back above the 150.00 area, but remains very much a buy on dips in the absence of a change in monetary policy.