Markets
Global core bonds are gaining ground today. Yesterday’s risk improvement after the US/China 90-day truce didn’t persevere today with Asian equity markets (except Chinese indices whom closed in green) setting the tone. US Treasuries rose further this morning. The front end of the US yield curve (5y-2y) inverted for the first time in more than a decade, hinting a looming recession and investors estimating that the end of the Fed’s hiking cycle is closer than originally thought. European equities opened with substantial losses, mirrored by a higher opening for the German Bund. It immediately paired those gains however and moved sideways for the rest of the day. Higher than expected EMU PPI’s didn’t influence trading much, with no other economic data being released today in the eurozone. The US eco calendar was entirely empty too. No fresh signals stem from Italy today as both Italy and the EU confirm willingness to work towards an agreement. Italian BTP’s edge somewhat lower anyway. The German yield curve bull flattens with changes ranging from -0.2 bps (2-yr) to -3.2 bps (30-yr). The US yield curve flattens too with yield changes from +0.6 bps (2-yr) to -3.9 bps (30-yr). The decline in risk sentiment pushed spreads over the German 10-yr yield higher, with Greece (+5 bps), Portugal (+3 bps) and Italy (+3 bps) underperforming.
Underlying drivers of today’s currency markets are hard to pinpoint and at times even conflicting. Slightly better EMU PPI’s were only of secondary importance from a currency point of view. From Asian trading onwards EUR/USD traded with an upward bias. Moves in the likes of USD/JPY reveal that it has more to do with dollar weakness rather than with euro strength. A fragile risk environment (i.e. declining core bond yields and equity markets) would suggest otherwise. The pair topped around noon with the US entering markets and is currently struggling to hold the 1.14 mark (1.1397 at the time of writing). It is possible US investors are frontloading some dollar bids as US financial markets are closed tomorrow in honour of George H.W. Bush. USD/JPY only recovers slightly from this morning’s knock-out punch. The pair is trading at 112.9.
Sterling jumped higher today after the attorney general of the EU’s Court of Justice said the UK has a right to unilaterally withdraw Article 50 – the article triggered by the UK following a 2016 referendum to leave the European Union. The attorney general’s non-binding opinion suggests there is no need for unanimity among the 27 other member states should the British government – although unlikely – reverse Brexit. News like this cuts both ways. It could provide the government the leverage needed to silence Brexit hardliners and win their support for the current brexitdeal on December 11th. The AG’s conclusion might on the other hand embolden pro-Remainers, triggering them to vote against the deal and stepping up efforts for a second referendum. Sterling took the report very well initially, surging below the EUR/GBP 0.89-handle but retracing all of the progress afterwards. The pair is currently trading close to 0.893. In his speech before Parliament, chair Carney defended the BoE’s projections in case of a disorderly Brexit. The bank was accused of presenting a “doomsday” scenario in order to help the government getting the deal through Parliament. The pound was little affected.
News Headlines
The South African economy grew with 2.2% in the third quarter (QoQa), beating expectations of a 1.9% increase and following a revised 0.4% decrease in the quarter before. The year-on-year GDP number rose from 0.4% to 1.1%, beating market expectations of 0.5%. Rebounds in finance, trade and manufacturing were the drivers of the growth.
French president Emmanuel Macron will reverse the planned fuel-tax hike, in the light of recent protests. Prime Minister Edouard Phillippe announced the decision of the French government today, saying that “no tax merits putting the nation in danger”. The protesting “Yellow Vests’ already said it was too little, too late.
