Markets
Global core bonds were mixed but little changed today. Risk sentiment turned cautiously positive as the Fed policy meeting is lined up for tonight. Asian markets performed mixed with Chinese and Japanese indices underperforming. European equities, however, opened all higher. US Treasuries opened neutral. With safe haven flows fading, German Bunds moved south, but intraday losses were paired to hover near opening levels at the time of writing. The economic not able to move investors, as risk sentiment ahead of the Fed meeting steered traders. With the worst performance of US equities ahead of a Fed decisive meeting since the 1980’s, investors are puzzled on what to expect. A ‘dovish hike’, a rate hike of 25 bps combined with a more dovish tone on future hikes (2 rate hikes next year instead of 3), is most likely. The US yield curve flattened with limited changes in a range of -1.2 bps (30-yr) to +0.4 bps (2-yr). The Italian government and the European Commission have ended their long-lasting budget feud as they agreed on Italy’s spending plans for 2019. Italian BTP’s rallied on the news, pushing the spread between the Italian and German 10-yr yield down with 15 bps. The German yield curve is little changed at the time of writing with changes varying between -0.4 bps (30-yr) to +0.3 bps (2-yr).
The dollar stayed in the defensive going into a keenly awaited Fed decision this evening. At the same time, the EC confirming that it won’t start an excessive debt procedure against Italy, removed a pending factor of uncertainty for European markets and supported some by default euro-buying. The recent decline on global equity markets took a further breather as investors hoped for the Fed to bring some kind of ‘dovish’ rate hike, potentially signaling slower policy normalization next year. This anticipated/hope for dovish Fed kept dollar bulls sidelined. Contrary to recent interest rate narrowing, interest rate differentials between the US and EMU/Germany were little changed today. In Europe, Italy and the EC reached a ceasefire on the rift over the Italian budget. Credit fundamentals of Italy are not restored and will remain an issue in the future. However, both parties avoiding an open battle is a (temporary) euro positive factor. EUR/USD is trading in the low 1.14 area (compared to a start of 1.1360 in Asia). USD/JPY is going nowhere hovering in the 112.30 area. Will Powell and co pull the trigger for a real USD trend-move after recent mainly sideways price action?
Sterling lost further ground against the euro but also against a broadly weaker dollar. There was little high profile Brexit news, but multiple headlines on all kinds of entities readying ‘no-deal-Brexit’ plans didn’t help sterling. UK November inflation (headline declining to 2.3%, core to 1.8%) was largely as expected, but was below what the BoE anticipated. So, there is no reason for the BoE to take any action as Brexit uncertainty persists. EUR/GBP rebounded north of 0.90 (currently 0.9025 area). Cable hovers up and down in the 1.26 big figure.
News Headlines
The European Commission officially decided not to launch the excessive debt procedure against Italy, which would have been the first in history. Parties have agreed a fiscal deficit of 2.04%, down from 2.4% earlier. The Italian 10y yield declined a whopping 15 bps. Italy’s stock exchange (+1.5%) outperforms its European peers.
Canadian headline inflation slipped from 2.4% YoY in Oct. to 1.7% in Nov. as oil prices slid further. Core measures showed also signs of slowing, easing from 2.0% to 1.9%. The BoC suggested a hiking pause at its latest policy meeting. Rate hikes expectations have diminished significantly since then and slipped further after the inflation report.
