November 6, 2019 / 8:49 AM / 7 days ago

Daily Briefing: Surge and pause

LONDON (Reuters) - Tuesday’s action across world markets was like a klaxon for the end of recession fears, justified or not.

FILE PHOTO: Traders work on the floor at the New York Stock Exchange, November 4, 2019. REUTERS/Brendan McDermid

A combination of rising optimism about a U.S.-China trade deal this month and signs from October’s global business surveys that tariff-hit manufacturing sentiment has reached bottom was enough to see some of the bets on a looming recession get scaled back.

A surprisingly strong expansion in U.S. services last month was another catalyst. This week’s record highs for Wall Street stocks and near two-year highs in other world markets was the most obvious reflection, aided by above-forecast readings from the earnings season.

But bond markets were on the move too, with 10-year Treasury yields reaching their highest since mid-September, the yield curve between three months and 10 years steepening to more than 30 basis points and 10-year German bund yields climbing to their least negative since July, less than -30 basis points at one point.

The 20-year bund yield even flipped briefly positive for the first time since July. The 10- year bund price is now down more than 4% since early September and inflation expectations embedded in the five-year, five-year forward inflation swap rose to their highest in six weeks at almost 1.25%. Emerging-market currencies and China’s offshore yuan reached their highest since early August.

And if you’re looking for more fuel, there’s been plenty to keep today. German industry orders rose 1.3% in September, more than expected. Carmaker BMW said its third-quarter operating profits jumped by an annual 33%, beating forecasts.

Investors are insisting recession is no longer the most likely outcome for next year, with DWS chief investment officer Georg Schuh telling Reuters he saw one chance in four the European Central Bank would raise interest rates in the coming year. And yet, the overnight market mood has been to pause, not to extend the gains.

Some of that is just a breather after a large move and some is obvious lingering uncertainty about whether the U.S. and Chinese governments do reach some sort of agreement later this month. There have been many disappointments before. And relief at dodging a recession is not the same as seeing robust growth and activity ahead.

Chinese President Xi Jinping and French President Emmanuel Macron at a signing ceremony inside the Great Hall of the People in Beijing, November 6, 2019

None of the depressing politics has gone away yet. The tariff war has not yet ended, the U.S. 2020 election campaign is heating up and Brexit decisions have just been put off a couple of months. According to the Confederation of British Industry’s latest survey, small UK manufacturers were their most pessimistic last month since just after the Brexit referendum in 2016.

And so, Wall Street stalled close its highs Asia’s major markets were little changed. U.S. and European futures held steady. Services surveys from around the world will be released through the day and will be watched for any reflection of the tentative turn in factory activity. Markets will now want some confirmation to support the week’s relief about the underlying economic improvement.

On the European corporate front, earnings expectations for the STOXX 600 have improved for the first time since late August, according to Refinitiv data. Germany is providing a lot of the third-quarter headlines: Adidas and its sales picked up, BMW’s operating profit jumped and Wirecard reported a 43% gain in third-quarter core profits, although its shares were down in pre-open trading.

In Britain, Mothercare is set to close all its British stores, M&S profit was down 17% on weak clothing sales and Intu Properties said it expects lower rental income for the year as more stores close. Shares in the latter could take a big hit.

Shares in struggling Norwegian Air will also be watched after it managed to raise $272 million from a combined sale of shares and convertible bonds. SocGen's restructuring costs hit third-quarter results.

Austria’s Andritz also posted a decline in third-quarter core profit. Other possible movers include supermarket group Ahold, which reported higher third-quarter earnings, and AstraZeneca, which intends to distribute Sun Pharma cancer drugs in China.

— A look at the day ahead from EMEA Markets Editor Mike Dolan. The views expressed are his own —

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