EM CEEMEA CREDIT: Aramco: Jafurah Output by End-Dec

The USD’s extended losses on the week’s progress toward ending the shutdown, but the market reaction does raise questions over how sustainable the USD pullback could be.

• US Treasury yields are higher across the curve as an end to the shutdown would prove growth-positive (the CEA saw the shutdown costing as much as $15bln per week) and that’s evident in the rebound for equities (NASDAQ futures are higher by 1.4% ahead of the US crossover).
• This pro-growth impulse has worked against the dollar – and, importantly, Fed pricing for December is still leaning in favour of a further 25bps rate cut in December (relatively unchanged from the Friday close). This will likely remain the most influential lever for any USD slippage toward well-held support at the 23.6% retracement for the Sep-Nov upleg at 99.382.
• There remain a handful of legislative hurdles worth monitoring before an end to shutdown: Senate is yet to formally schedule a vote final passage, and a House vote will have to follow (likely on Wednesday). This would clear the path for government to fully reopen on Friday, which we see as allowing key economic data (most importantly the September NFP print) within a week.

• The Telegraph reports that Chancellor Rachel Reeves is looking at raising the basic rate of dividend tax from the current 8.75% to make it more equivalent to how income on labour is taxed (when corporation tax is also taken into account). The story notes that to make it fully equivalent would see the tax rate almost doubled to 16.5% but that Reeves is considering a smaller but still significant increase to 12.75% - which would reportedly raise around GBP1.5bln. However this also runs against Reeves' stated aim to increase equity investment in UK companies although she may be hoping that any loss of equity holdings here would be offset by reductions in the cash ISA limit encouraging more people to use their ISA to hold equities. The Telegraph also reports that Reeves is looking at reducing the tax-free savings allowance for dividends which currently allows basic rate taxpayers to earn GBP500 through dividends before being taxed. Changes to the higher and additional rates from 33.75% and 39.35% respectively are not expected as these are already more equivalent to how labour is taxed. However, this will be another disincentive for people to take risks. Part of the reason that this "unearned income" is taxed lower than income from labour is due to the higher inherent risks involved in owning equity. See the full Telegraph story here.
• A large majority of the other reports that we have seen regarding the Budget from the weekend press have been opinion pieces - a large number of these on income tax and exit taxes - rather than on any specific new policies.

10-Year spreads vs. Bunds little changed to 1bp tighter on the day, aided by the recovery in wider risk appetite given the tentative movement towards the reopening of the U.S. government.

• OATs & the peripheral see a fairly uniform ~1bp of tightening, no outperformance for Greece evident after a move to Positive outlook at Scope Ratings on Friday.
• French & Belgian fiscal risks remain front and centre on the headline front, while Iberian & BTP outperformance vs. OATs continue to present the medium-term market theme of note.
• EUR 3m10y vol trades further above 50bp but still remains at supressed levels given the market’s late stage/completed view when it comes to the ECB’s rate cutting cycle.