Markets
Global core bonds paired intraday gains today in a fragile risk environment. Asian equity markets continued yesterday’s sell-off on WS, giving safe havens some upward potential. US Treasuries and German Bunds opened neutral, but with an upward appetite as European equities opened in red as well. The German IFO business confidence colored the European calendar today and decreased to 101.0 in December, down from 102.0 the month before. Market consensus was 101.7. The forward looking component printed lower than expected too. It had little impact on trading as the German DAX index was one of few European indices that traded (little) in green throughout the day. US housing data surprised on the upside, after recent data pointed to a cooling down of the housing market. However, investors keep their focus on the Fed meeting of tomorrow. US Treasuries and German Bunds fell lower in the run up to the US opening. Main stock markets gain over 1.0%, putting further pressure on core bonds. The US yield curve edges lower with changes ranging from 0.8 bps (2-yr) to 1.2 bps (5-yr). The German yield curve is mixed with changes varying between -0.9 bps (30-yr) to +0.3 bps (2-yr).
The euro remained well bid with volatility fairly muted going into tomorrow’s crucial Fed meeting. The common currency traded flat during Asian hours but started an upward trend as soon as European dealings kicked off. The German IFO-indicator came in close to expectations and remained relatively stable compared to last month. That might have comforted euro bulls, especially after last week’s dramatic PMI’s. EUR/USD also found solid support in narrowing US/EMU interest rate differentials up until noon. With US early birds entering the market the narrowing process halted/reversed, turning the tide for the dollar. EUR/USD’s 1.14-test failed and is changing hands at 1.137 at the time of writing, up from this morning’s 1.1348 opening. USD/JPY left intraday lows but it still down from yesterday (at 112.47 from 112.8).
May’s cabinet discussed planning for a no-deal scenario today but stressed that seeking a deal with the EU is still “top priority”. Negotiations are ongoing and will continue going into 2019. Against the background of Parliamentary recess starting this Thursday, we expect Brexit to temporarily slumber at investor’s minds. EUR/GBP trading is left to technical considerations with intraday volatility reinforced by lower liquidity in markets. We witnessed a preview of such trading conditions today as EUR/GBP was whipsawed, swapping gains for losses and vice versa. The pair is currently trading at 0.899, close to today’s opening levels. Cable tested the 1.27-handle but lost ground afterwards, mainly due to dollar strength. The pair trades at 1.264 currently.
News Headlines
US housing starts and building permits beat forecasts in November. They resp. rose by 3.2% M/M and 5% M/M following downward revisions to Oct. outcomes. The data sooth fears over a cooling housing market after the weak Dec. NAHB housing index yesterday, though single-family starts, a key segment, fell to the lowest since May 2017.
EU Commissioner Moscovici said France won’t be sanctioned over their increased 2019 budget deficit and repeated he is confident that the EU and Italy will find an agreement as well, so it avoids sanctions too. Italy lowered its GDP growth forecast for next year with Deputy PM Di Maio saying Italy made all the budget concessions possible.
The UK cabinet met to implement measures for a no deal scenario even as getting PM May’s deal approved in Parliament remains the governments priority. Pre-emptive measures include additional information for citizens. The tax office will give businesses guidance to prepare for border changes and £2 bn of money reserved for no deal preparations will be released shortly.
