Markets
Global core bonds lost ground today despite the persisting risk-off environment and with trading volumes still rather low. Apple’s revenue warning pushed equities further south during Asian trading. European equities went along and opened lower. Global core bonds couldn’t really profit despite this risk aversion. Both US Treasuries and German Bunds moved gradually lower throughout the day. Investors already priced in a lot of growth concerns the last couple of weeks, possibly suggesting that core yields are setting a bottom. Rising oil prices probably played a role as well. Solid to strong employment data in the US had little impact on trading, with investors the US Note future currently gaining modest ground on a disappointing US manufacturing ISM. Focus now shifts to tomorrow’s payrolls report. The US yield curve flattens with changes in the range of +0.9 bps (2-yr) to -1.8 bps (30-yr). German bonds lost ground as well but in a smaller order. The German yield curve flattens, with changes varying between -0.2 bps (2-yr) to +2.1 bps (30-yr). Peripheral spreads over the German 10-yr yield widened with Italy heavily outperforming (+15 bps), despite the Italian FTSE MIB equity index outperforming other EU equity indices.
Global FX markets tried to find their composure after this morning’s ‘flash crash’. In this move, the yen jumped sharply higher against most majors as investors were looking for shelter in the wake of growing evidence of an economic slowdown in China. EUR/JPY and USD/JPY are trading well off the intraday lows touched in Asia this morning. However, the yen is still trading about 2 % to 3% stronger since the start of the year against the dollar and the euro, respectively. This morning, the euro tried a cautious rebound as the sales warning from Apple suggested US companies/the US economy might face bigger than expected fall-out from the Chinese slowdown. However, as was the case yesterday, the EUR/USD intraday uptick had no strong legs. EUR/USD hovered sideways in the mid 1.13 area. US-German interest rate differentials widened slightly after recent sharp narrowing, but are providing few clues for EUR/USD trading. The US ADP December private job report contrasted with recent negative headlines, printing a strong 271k of additional jobs. US jobless claims rose slightly more than expected. The reaction of US interest rates and the dollar was insignificant. A weak manufacturing ISM currently pushes EUR/USD for a test of 1.14. USD/JPY is trading in the low 107 area.
Sterling trading was mainly driven by technical considerations today. EUR/GBP eased after the pair tested the 0.91 area during the overnight spike in FX volatility. The UK construction PMI declined from 53.4 to 52.8, mainly as expected. There was still little news on Brexit. EUR/GBP is trading in the 0.9020/35 area, returning to yesterday’s trading range close to/slightly north of 0.90.
News Headlines
The US labour market added the most jobs in December since February 2017, according to wage processor ADP. The bulk of the 271k increase came from the services sector. Soft weather conditions helped. The outcome significantly beat 180k consensus, coming from a downwardly revised 157k in November. US weekly jobless claims rose from 221k to 231k. Markets expected a stabilization, but claims remain extremely low in absolute terms. The US manufacturing ISM unexpectedly plunged from 59.3 to 54.1 in December with new orders slumping the most in nearly five years. Employment, delivery and inventory gauges fell as well.
Dallas Fed Kaplan suggested that the Fed should take no action in the first couple of quarters and watch the impact from the global growth deceleration, weakness in interest and economic-sensitive industries and tighter financial conditions (credit spreads widening). He expects US GDP growth to drop below 2% this year and to trend in 2020 (1.75% of GDP) as the fiscal stimulus boost wanes and as past Fed rate hikes kick in.
