Strong momentum in rates markets continued through Asia trading and early Europe with the US front end rallying 3/4bps to mark a roughly 15bps decline in 2s yields from their Tuesday intraday high. Yesterday’s slide in banking stocks on downbeat guidance from a couple of major players combined with a slide in oil prices (momentum trading and technical factors?) for an aggressive bid in global rates that is going unchecked this morning. Global markets await the release of US CPI data at 8.30ET, though barring a massive miss these figures are unlikely to motivate a 50bps cut by the Fed next week.
Yesterday’s US presidential debate has likely strengthened the odds of a Harris presidency as the VP mostly stuck to an unexciting script while former Pres Trump struggled with comments on policy and instead delivered bizarre remarks like illegal immigrants “eating the dogs, […] eating the cats”. Rising Harris winning odds would, in a bubble, support global trade sentiment on an avoidance of Trump’s tariffs while also presenting a less malign fiscal path for the US. Mexico would also benefit from a less confrontational approach by the US to trade and immigration.
USTs are bid 3/4bps across the curve this morning, while German debt marginally lags about 1bp but gilts strongly outperform with 2s lower by 7bps with a UK GDP miss this morning partly behind the divergence. Though USTs aren’t showing an obvious flattening that may take place on unwinding Trump fiscal risk bets, SPX futures down about 0.5% may be a better reflection of the market’s interpretation of the implications of the debate. Japan’s Nikkei suffered a 1.5% drop today in part due to hawkish comments by the BoJ’s Nakagawa on the “level of real rates [being] extremely low”. Her comments also lifted the JPY that is leading the majors with a 0.7% gain on the day in a broadly dollar-negative day.
The MXNJPY weakened below the 7.00 yen level this morning for the first time since March 2023 on the dual hit of Nakagawa’s comments and the overarching anxiety over Mexico’s judicial reform process in Senate. The technical breach in the cross seems to have prompted peso buying, as, at writing, the MXN’s 0.6% gain is the second best among the key currencies, leaving it below the 20 pesos levels (just about) ahead of the release of industrial/manufacturing production data at 8ET that is the Latam release highlight of the day. But this will not be the focus of local markets (even US CPI will be of greater importance).
Around midnight local time, Mexican senators approved AMLO’s judicial reform proposal in general terms in a 86–41 for-against split where a PAN senator voted with the incumbent party’s coalition. Note that his vote was not quite ‘needed’ as the absence of an MC party senator meant 85 ‘ayes’ were sufficient to meet the two-thirds required. The upper chamber will now look at the decree ‘in the particular’ where some minor, inconsequential on the whole, changes may be made before rubber stamping it and sending it to its next stage, the ratification of the reform by 17 out of 32 state legislatures—a virtually procedural step as Morena controls two-thirds of these. We’ll watch reactions by local firms and/or foreign officials to the passage of the reform to gauge possible economic and market risks.
—Juan Manuel Herrera
DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.