Decent volumes in Europe yesterday ahead of the most important expiry of the year today (Eurostoxx50 +60% vs 20 days average), with the market managing to close flattish after recovering 30bps, mainly buoyed by Financials (higher rates), Healthcare and Real Estate.

Well bid US markets on light volumes with leading sectors such as Semiconductor and Software. US Treasury Secretary Mnuchin said the USMCA deal (likely to be signed soon) could add 0.5% to US GDP, which may have supported the market’s already positive economic outlook. Higher interest rates in Europe along each curve (3/4bps), with Btp/Bund spread widening.

In focus, the Bank of England held rates unchanged at 0.75%, with 7 to 2 votes. Michael Saunders and Jonathan Haskel maintained their dovish stance. Interestingly, the BOE’s key rate has stayed at 0.75% throughout the whole 2019. Brexit uncertainty the main reason. Still traders see an 80% probability of the central bank cutting by December 2020.

While Norway central bank kept rates unchanged but signaled 40% probability of a hike in 2020 (hawkish), Sweden central bank hiked its benchmark repo rate by 25bps to 0 (hawkish), exiting the subzero rate. Rates are still negative in Euro area, Japan, Denmark, Switzerland and Hungary.

The US Senate approved a nearly $1.4 trillion spending deal to keep the government funded and avert a shutdown at the end of the week.

Today US Q3 GDP revision, Personal Income and Spending.

Global yields are rising thanks to US-China phase one deal, Macro momentum etc (extensively discussed). This is clearly visible from the current amount of global negative yielding debt, now down to $11.4 trillion from $17 trillion in August 2019 (chart).

Global Negative yielding debt

Interestingly, we are seeing yield-curve steepening in US and Europe (bear steepening effect where long-term yields rising at a faster pace than short-term yields). In particular, US 10-year yield has risen about 40bps since the beginning of October, while the the 2-10-year curve has recently steepened well above its 200 days moving average (chart).

2-10 year Treasury yield curve

In addition, the collapsing spread between BBB and BB bonds is seen as bullish sign for US equity markets. The previous record low in the spread was February 2005, right in the middle of an extended US equities bull market.

Blue (S&P500 index) vs Green (BBB-BB spread) vs Red (recession)

Also, to note a contrarian signal, the bull-bear spread in the AAII weekly survey rises to 24, the widest since February 2018, hitting a 2019 high overnight and Bull/Bear ratio registers highest since January 2018 (2.15x as many bulls out there).

AAII Survey

In Spain, after Europe’s top court affirmed that Esquerra Republicana’s leader Oriol Junqueras was immune from prosecution and should be freed from jail, there will be rising risk tensions in Catalonia that could undermine the possibility of forming a governing coalition between PM Sanchez and a Catalan separatist fraction.