Take Five: After the storm

1/ MILLION DOLLAR QUESTIONS

Election week was not kind to the dollar. It flirted with yearly lows following a closer-than-anticipated contest that scuppers plans for a spending splurge and ushers in more predictable trade policies.

The world’s reserve currency might well catch a bid from safety-seekers if a protracted election crisis ends up in the courts. Further out, there are headwinds.

Inflation-adjusted ‘real’ yields on 10-year Treasuries are negative and that won’t change any time soon — in September, analysts predicted nominal yields at 0.93% in 12 months, or about half the expected average inflation rate.

The question is whether negative real returns deter foreign buyers who own around 40% of U.S. government debt. Upcoming inflation data is expected to show consumer prices rose 0.2% in October for an annual 1.4% rate.

Ten-year yields are currently below 0.8%.

2/ FOR-BIDEN YIELDSNo need for official confirmation to declare China’s yuan one of the election winners. It has soared to 28-month highs on the view that a Democrat White House will bring calmer relations between the world’s two biggest economies.

Or, as the editor of China’s Global Times approvingly quoted a “smart netizen” as saying: “Beijing is For-Biden city.”

The Biden factor adds to upward yuan momentum: Beijing’s containment of the pandemic and an almost 250-basis point gap in 10-year U.S. and Chinese government yields is a recipe for more
3/BREXIT DEADLINE (AGAIN)

Britain and the European Union have until Nov. 15 to try, yet again, to hammer out a Brexit trade deal. Such deadlines have come and gone before but this one matters because the transition period — under which Britain has remained in the EU customs union and single market — ends on Dec. 31.

Both sides say a deal can be done. But the EU’s chief negotiator has warned of “very serious divergences,” so trade disruptions may be just eight weeks away.

It is a reminder of the uncertainty the UK economy is facing; indeed, the Bank of England just delivered a larger-than-expected stimulus increase to limit the fallout from new coronavirus lockdowns and Brexit.

As talks head into extra time, markets also get insight into the economic outlook — UK Q3 GDP data comes on Thursday, alongside industrial production numbers.

4/THE SUB-ZERO CLUB

Southern Europe may be about to join the $17 trillion global pool of negative-yielding debt.

As U.S. election uncertainty and expectations of more ECB stimulus drive U.S. and German borrowing costs lower, more investors are heading for Italy or Spain where they can still pick up some yield.

Perhaps not for much longer. Italian five-year yields have just turned negative; 10-year Portuguese and Spanish bonds pay less than 10 bps. Upcoming data, including Germany’s ZEW sentiment indicator, could be a catalyst to push borrowing costs for these countries — not too long ago mired in debt crises — below 0%.

Graphic: Portugal’s sovereign bond yield curve – https://fingfx.thomsonreuters.com/gfx/mkt/xklpymxewpg/theme1106.png

5/COUNTER-ORDER: DROP THAT VALUE ROTATION!

For a while now, sell-side analysts have pitched an idea: it’s time to rotate towards value stocks. This cheaper market segment, comprising bank and energy shares, has lagged growth-linked sectors such as tech by 40% in the past year.

Expectations of increased U.S. stimulus finally lifted value stocks in the days before the election. Many in the sell-side even doubled down on the value pitch. Ultimately, investors who didn’t heed that advice proved lucky.

A tight U.S. election outcome and signs of a Republican-led Senate have abruptly halted the reflation trade. The Nasdaq stars and IT champions have rallied as markets wait for clarity on the big-spending plan.