Markets
Global core bonds are erasing intraday gains as US investors enter dealings. German Bunds outperform US Treasuries. Risk sentiment soured this morning as the US government shutdown set a record while Chinese trade data disappointed. There’s no solution in sight with regards to the shutdown which probably starts having repercussions for the growth. The EMU trading session left no traces with November EMU production data disappointing (-1.7% M/M) as expected. The ECB warned Italian Monte dei Paschi di Siena in a letter containing draft conclusions after an annual supervisory review about the funding risks it faces. Italian stock and bond markets underperformed, partly explaining the Bund’s outperformance against the US Note future as well. On top, European investors probably prefer to err on the cautious side ahead of tomorrow’s brexit vote. German yields decline by 1.1 bp (2-yr) to 2.1 bps (10-yr) at the time of writing. Changes on US yield curve vary between +0.2 bps (30-yr) and -1.5 bps (5-yr). 10-yr yield spread changes vs Germany are close to unchanged with Italy marginally outperforming (+2 bps). The Italian debt agency announced to launch a new 15y syndicated benchmark in the near term. The bond sale will be closely watched and an important proxy for sentiment towards Italy/Italian politics.
Trading in the major dollar cross rates was confined to very tight ranges. Risk sentiment deteriorated further as poor Chinese December foreign trade data spurred investor uncertainty on the Chinese (& global) economy. Political event risk (Brexit vote and the US government shutdown) are also an ongoing source of investor uncertainty. However, it didn’t help the USD dollar. EMU November production data were very poor, as expected, but ignored by FX traders. EUR/USD held an extremely tight sideways range close to, mostly slightly above, the 1.1450 handle. Interest rate differentials were no big issue for EUR/USD trading as both German and US yields declined due to the risk-off environment. USD/JPY declined In Asia this morning, but found a new ST equilibrium in the low 108 area.
UK PM May staged a final attempt to convince lawmakers to approve her Brexit deal ahead of tomorrow’s vote in Parliament. In a speech in central England, she repeated that rejecting her deal risks to end up in no Brexit at all. The UK PM also exchanged letters with the EU to get assurance that the EU will try to avoid an implementation of the Irish border backstop, if possible. However, the EU assurance most probably won’t change tomorrow’s voting in any profound way. Sterling is still trading with a tentative positive bias though, as was the case on Friday. Some investors are apparently adapting positions for a scenario of Brexit being delayed beyond March 29. EUR/GBP is trading in the 0.8920 area. Cable gained a few ticks towards the 1.2850 area.
News Headlines
The Eurozone industrial production fell more than anticipated in November, posting a -1.7% monthly (-3.3% YoY) decline vs. -1.5% (-2.1%) expected. The sharpest fall since February 2016 shouldn’t come as a total surprise though, given the dismal data published earlier this month by Germany, France and Italy.
Hopes for a political breakthrough in Sweden are fading just days after Löfven’s Social Democrats forged a (minority) government deal with Green party, Center Party and Liberals on Friday. The Left Party said it can’t accept having “zero influence” and announced it would not back the agreement nor Löfven as PM this Wednesday.
Citigroup kicked off the 2018 Q4 earnings season on a downbeat note. The bank missed EPS estimates as high market volatility kept clients on the sidelines. Revenue from fixed-income trading slipped 21% last quarter to the lowest in 7 years. Going forward, Citi still believes it can achieve profitability gains, aiming for a 12% ROE in 2019 up from 10.9% last year.
