Markets
Global core bonds gained ground today as the improvement in risk sentiment came to a halt overnight. Further progress in US-Sino trade talks didn’t weigh up against disappointing economic data in China and Japan, pushing Asian equities south. European indices followed the move and opened substantially lower. Weaker than expected EMU PMI’s weighed even further on sentiment. Safe haven flows were in play, with both the German Bund and US Treasuries gaining ground. Market sentiment improved slightly, with European equities erasing half of its intraday losses. Core bonds topped as well. Better than expected US Retails sales and China officially confirming it will lower import taxes on American cars weighed further on US Treasuries and German Bunds. The German yield curve steepened with changes ranging from -2.3 bps (2-yr) to +0.5 bps (30-yr). The US yield curve bull flattens. Changes range from -1.9 bps (2-yr) to -2.2 bps (30-yr). The EU still wants more concessions from Italy, after the government proposed a new 2019 budget deficit of 2.04%, down from the originally planned 2.4%. The European Commission is seeking a “final push” of around €4bn (or 0.2% of GDP). Peripheral spreads widen with Italy (+5bps) and Greece (+4 bps) underperforming.
EUR/USD traded flat ahead of EMU PMI’s. Markets held their breath after France published below 50 PMI’s (49.3), which would suggest economic contraction going forward. Euro bulls eventually threw in the towel as again weak(er than expected) German (52.2) and EMU wide (51.3, the lowest in 49 months) business confidence revealed France’s deteriorating sentiment isn’t an isolated case. At the same time, a risk-off sentiment (as fears for global growth mount following weak Chinese and Japanese data) and ironclad US November retail sales kept the dollar well bid. EUR/USD nosedived well below 1.13 to reach a session low of 1.127. The pair is currently trading at 1.128/9. The Japanese yen’s lackluster performance in today’s risk-off environment is striking. USD/JPY is filling bids at 113.6, virtually unchanged from opening levels.
Sterling started on soft footing, reversing yesterday’s gains. EUR/GBP’s sharp move south later on was inspired by euro weakness (soft PMI’s) rather than sterling strength. The rebound of the currency pair around noon was testament to markets avoiding sterling long exposure. The British PM May addressed the press shortly during the European summit but no news there. Discussions with the EU are ongoing and she is confident pushing the deal through Parliament eventually. She also confirmed the January 21 deadline for Parliament to cast a new vote. EUR/GBP is trading close to opening levels at around 0.899. Risk-off and strong US retail sales sent cable tumbling below 1.255.
News Headlines
Swedish former prime minister and Social Democratic leader Stefan Lofven lost a second crucial vote in parliament today. The rejection of Lofven as new PM keeps Sweden in a political deadlock and raises the chances of new snap elections. The Swedish krona gained little on the news.
US November retail sales were substantially stronger than expected. Headline sales rose 0.2% M/M (vs 0.1% exp.), caused by a lower oil price. Core sales (excl. automobiles, gasoline, building materials and food) jumped 0.9% M/M. The October figure was also upwardly revised. The data hints a solid impact from private consumption to Q4 growth.
Russia’s central bank raised its policy rate to 7.75%. They said the move is proactive in nature to limit inflationary risks, especially on a short-term horizon with inflation reaching the 4% inflation target soon due to a weaker rouble and a VAT increase. The bank also announced to restart purchases of foreign currency linked to oil related income.
