Markets
Global core bond were mixed yesterday in the wake of the (from a markets perspective) disappointing Fed policy decision. European equities tried to limit losses, but eventually closed 1%-2% lower. German Bunds edged higher on safe haven flows. The German yield curve flattened with changes varying between -2.7 bps (30-yr) and +0.5 bps (2-yr). Risk sentiment deteriorated even more as the US joined trading. US President Trump revived the risk of a government shutdown, the US/UK accused China again of cyber espionage and oil prices are falling even more. US Treasuries edged lower in a reaction to the possible shutdown, hinting that investors are starting to price in some kind of risk-premium. The US yield curve bear steepened with changes in the range of +2.5 bps (2-yr) to +6.8 bps (30-yr). Today’s risk sentiment will be tilted to the downside as there are too many negative wildcards in play, especially in times of (global) growth concerns. We notice a declining appetite for core bonds today at openings, despite the risk-off continuing in Asia this morning. Chinese and Japanese indices are underperforming. Today’s eco calendar is richly filled (see headline below), but will remain secondary to investor sentiment.
Yesterday, the USD was trend downward. The ‘dovish Fed rate hike’ temporary supported the USD, but the move lacked conviction. Ongoing doubts on the Fed rate strategy going forward gradually put the US dollar again under pressure. The risk-off sentiment and lower oil prices this time didn’t help the dollar. The risk of a US government shutdown also weighed on the US currency even as US yields went a few bp higher late in US dealings. This morning, risk sentiment in Asia remains fragile. The trade-weighted dollar stabilizes in the mid 96 area after yesterday’s setback. EUR/USD hovers in the mid 1.14 area. Later today, there are mainly second tier eco data in Europe. The eco calendar in the US is well filled with the Final Q3 GDP release, durable goods orders, personal income and spending. In the wake of Wednesday’s Fed decision, markets will scrutinize activity data and the PCE price deflators are interesting, too. We see some asymmetrical risk for the US currency, with the dollar being more sensitive to negative than to positive eco news. Headlines on the US government shutdown are a wildcard. Yesterday, EUR/USD already came within reach of the 1.15 resistance. A new test is possible. Market liquidity will dry up over the next days. We maintain the working hypotheses that the 1.1621 resistance will hold for now. That said, market unease/uncertainty with the Fed strategy going forward is not positive for the dollar. In this respect, it also not that sure that the dollar will profit from higher US yields if this is due to the market pricing some kind of US risk premium.
Yesterday, EUR/GBP mainly followed the EUR/USD rebound despite stronger than expected UK retail sales. The BOE as expected left is policy rate unchanged but warned on potential growth risk due to Brexit related uncertainty. EUR/GBP closed the session at 0.9043. Today, the UK budget data are probably of second tier importance for sterling trading. The Brexit headlines might become a bit less prominent as UK politicians are taking their end of year recess. Even so, we don’t see a trigger for any meaningful sterling rebound anytime soon. The EUR/GBP 0.91 area is the next important EUR/GBP resistance and might be retested in thin market liquidity conditions.
News Headlines
US President Trump has said he will reject a short-term funding bill that the Senate had passed to avoid a potential US government shutdown. Trump won’t back the bill unless $5bn in funding is approved to build a wall along the US-Mexico border.
US and UK authorities have accused China of a worldwide campaign of cyber attacks against the US, the UK and other allies. The US justice department charged two Chinese nationals with conducting several attacks on behalf of the Chinese intelligence service. The Chinese government has denied any involvement in an official statement.
Today’s eco calendar is richly filled. In the US, inflation data and durable goods orders for November are published. Canada releases its October GDP results and Consumer Confidence for the EMU is printed.
