Stock markets were once again the highlight last week as coronavirus cases spiked higher globally, although US equity markets recovered on Friday as hopes for a vaccine were renewed. Powell also got markets worked up with his dovish testimonies through the week where he highlighted the need for a sufficient pandemic fiscal stimulus package. Towards the end of the week we heard that House Speaker and US Treasury Secretary Mnuchin were looking to revive talks, with the Democrats preparing a new USD 2.4tn aid package, however expect some pushback from the Republicans. 10-year yields rallied 4 basis points to close at 0.66% on Friday, while the dollar (DXY Index) gained 1.85% over the week.
Of interest last week was FTSE Russell’s announcement of inclusion of Chinese government bonds in its key World Government Bond Index, from October next year (further updates on size and exact date due in March 2021). This follows the rejection last year, however, FTSE Russell said “Chinese authorities have implemented significant improvements to the fixed income market infrastructure to expand access to international investors”. This inclusion will no doubt boost the internationalisation of the USD16tn Chinese bond market and renminbi, and joins the Bloomberg Barclays Global Aggregate Index and the J.P. Morgan Government Bond Index-Emerging Markets. With record low interest rates elsewhere, China’s ~3.1% 10-year yields will no doubt look attractive especially for an A+/A1 rated nation. As a comparison sub-investment grade, Ba2/BB- rated Brazil is currently trading at ~3.8% on the 10-year benchmark.
Over the weekend China’s industrial profits showed further recovery, for the fourth straight month. As a result Asian bourses have started the week on the front foot and US equity futures are up. However, as governments continue to struggle to find the balance between containing infection rates, supporting their economies and attempting to avoid a second lockdown, sentiment is expected to remain fragile this week. Today kick’s off with the final scheduled round of Brexit talks, which are expected to be contentious given the backlash of PM Johnson’s Internal Market Bill. Also of interest could be ECB President Lagard’s attendance at the European Parliament hearing. With only 35 days remaining until the US elections, Tuesday will see the first presidential debate between Trump and Biden. Datawise we have Japan and German CPI readings and US and Euro-area consumer confidence releases. PMI readings for China, US ADP and pending home sales, US and UK GDP, EuroArea CPI amongst others will be released on Wednesday. The ECB’s Lagarde once again present, this time at the “ECB and Its Watchers” conference and later we will hear from Minneapolis Fed President Kashkari on Covid-19 and the economy. Former FBI director James Comey is due before the Senate GOP on the 2016 Trump-Russia collusion probe.
Thursday’s highlights include NY Fed President Williams’ welcome remarks at the FinTech conference and the EU Summit in Brussels. In terms of key data we have US ISM manufacturing, auto sales, construction spending and jobless claims, and a number of Markit PMI readings for the likes of the EuroArea, UK, Germany, Italy, Spain and France, amongst others. EuroArea unemployment will be another key reading for markets. Friday’s US employment reports will be watched by many, especially as it is the last before the US elections. Non-farm payrolls are expected to maintain their upward shift, following 5 months of improved data. US factory orders and durable goods readings will also be watched closely. The week will close with Philadelphia Fed President Harker discussing workforce recovery, and US Health and Human Services Secretary Alex Azar is due to testify before a congressional committee on the coronavirus crisis and the Trump administration’s portrayal of Covid-19 deaths. Closer to home, and coupled with Brexit woes, gilt yields could fall following the BoE’s Silvana Tenreyro’s comments about ‘encouraging’ discussions surrounding the use of negative interest rate policy and the ability for banks to adapt well, all eyes and ears will be focused on any further updates.