Markets

Yesterday, the markets took a break after the risk ceased on Monday. European stocks rebounded + 1%, but major US indices closed little change. Too little to conclude that a sustained buy-on-dips is still in vogue. Underlying yields (less than 1bp higher for German yields, up to 1.2bp in the US) also suggest investors remain cautious after Monday’s substantial drop. The dollar also did not show a clear directional trend, with the DXY closing slightly softer at 93.20. EUR / USD ended the day unchanged at 1.1726.

Asian markets reflect this morning on the next steps for Evergrande sage as Chinese markets reopen. The company came to an agreement on a negotiated coupon payment, suggesting some sort of orderly process going forward. The PBOC also added ample liquidity. The Chinese and Japanese markets show modest losses of

The data will be overshadowed by Evergrande’s continued fallout on global sentiment and even more so by market positioning ahead of the Fed. Our preferred scenario is for the Fed to announce the start of tapering for October and provide a clear timeline on the pace of the reduction. A “go ahead” in November to reach a broader consensus is one option. The markets will also keep a close eye on the new dot plot. Powell will likely maintain the line that there is no direct link between the end of asset purchases and the start of the rate hike cycle. Nonetheless, a higher inflation forecast could prompt a majority of individual governors to already signal a first rate hike at the end of 2022 and follow-up increases in 2023 and 2024 (2 or 3?). The start of tapering will not be a surprise for the markets. However, concrete actions could still lead to a new repositioning on the short and medium segments of the curve (2-year, 5-year sector), driven by higher real returns. Even in a bearish flattening movement, the 1.37% resistance for the 10-year yield could also be tested. The final “go” for policy normalization could support the dollar at least in the short term. EUR / USD 1.1664 is the first key benchmark on the charts, with 1.1603 (November 2020 low) the red line in the sand.

News headlines

The Hungarian central bank (MNB) raised its key interest rates by 15 basis points, halving the milestones by 30 basis points in the previous three meetings. The base rate now stands at 1.65% and the MNB intends to stick with the upward cycle until the inflation outlook stabilizes around the central bank target in a sustainable manner and that inflation risks are balanced. Inflation will remain above 5% for the rest of the year, start to decline from the start of 2022 and return to the tolerance band in the second quarter of 2022. Inflation will then stabilize around the target. by 3% in the second half of 2022. The risks remain on the rise. Hungary’s GDP will grow between 6.5% and 7% in 2021 and 5% to 6% next year, but the fourth wave of the pandemic increases downside risks and justifies the slower pace of progress. Weekly bond purchases will drop from HUF 50 billion to HUF 40 billion in the fourth quarter with a next valuation in December. The forint initially lost ground as the consensus expected a 25bp rate hike, but the local currency was later comforted by the MNB’s pledge to keep inflation under control. EUR / HUF closed below 353 after testing 355 intraday and ending a 3-day losing streak.

The US House of Representatives has passed a bill to extend the suspension of the US debt ceiling until December next year and avoid a government shutdown on October 1. In a party line vote, 220 Democrats voted for and 211 Republicans against. The real battle will be in the US Senate as the legislation needs 60 votes to pass, which seems impossible at this stage of the 50-50 split Senate. Republicans see it as an implicit endorsement of President Biden’s spending spree and said Democrats would be better off using special legislation to bypass the required 60 votes in the Senate.