Markets
Global core bonds gained ground today as risk sentiment deteriorated throughout the day with the Brexit vote lined up for tonight. Asian equities closed today’s session with gains, moving higher on news that the Chinese government will enhance its fiscal and monetary measures in 2019. European equities spurred higher as well but the tide turned almost right away. The German Bund profited, partly on the back of safe haven flows. Germany printed a first reading of its 2018 growth figure (1.5%), which is the weakest rate since 2013. The result was in line with market expectations but supported the risk-off moves that were already in play. The German yield curve edged lower with changes in the range of-1.3 bps (2-yr) to -2.7 bps (10-yr). US data printed weaker than expected, pushing US Treasuries further north. The US yield curve was mixed with changes varying between 1.5 bps (5-yr) to +1.1 bp (30-yr). Italy’s first syndicated deal this year (15y) was successful as it attracted more €30bn in bids, showing that investor sentiment drastically improved as the budget dispute with the EU moved to the background. The Treasury eventually printed €10 bn causing the Italian BTP future to lose some ground because of this unexpectedly high amount. The Italian 10-yr yield increased 3 bps, causing the credit spread over Germany to widen (+6 bps).
The euro staged quite a disappointing performance today. The odds for a EUR/USD rebound looked quite favorable this morning as Asian equities rebounded. EUR/USD traded in the 1.1480 area at the start of European dealings and European equities opened with severe gains. However, sentiment in European markets faltered soon sending EUR/USD back south in the 1.14 big figure. Euro selling accelerated after the publication of (unconvincing) German 2018 growth data. EUR/USD touched an intraday low in the 1.1415 area when US traders joined the action. From there, euro weakness was counterbalanced by similar USD softness as US data disappointed. EUR/USD trades currently in the 1.1440 area. A less positive equity sentiment in Europe and a decline in core yields also caused USD/JPY to reverse most of this morning’s gain. The pair trades again in the 108.40 area.
EUR/GBP developed an erratic like trading pattern near 0.89. Most investors kept sidelined eagerly awaiting the next step in the Brexit drama. The market already discounts that PM May’s Brexit deal will be rejected by a big majority. The question is : what next? Since the end of last week, sterling rebounded as a part of the market assumes Brexit will be delayed, which is seen as a ST sterling positive. However, several other options are possible. Immediately after the outcome of the vote, sterling might react to the magnitude of May’s defeat, but focus will soon turn to the next step. EUR/GBP trades close to 0.89. Cable is drifting away from recent ‘peak’ north of 1.29. Part of this move mirrors today’s overall USD rebound rather than any move in sterling ahead of the Brexit vote.
News Headlines
The Empire Manufacturing business confidence failed to meet market expectations as the headline figure tumbled to 3.9 in January vs. 10.0 expected. Forward looking sub components suggest little improvement. US PPI data also printed softer than consensus with core measures showing price stabilization whereas a 0.2% increase was expected.
JP Morgan Q4 earnings fell short of consensus as the bond-trading section’s plunge outweighed an increase in equity-trading revenue and advisory fees, resulting in the worst quarter in three years. Wells Fargo missed revenue estimates but topped profit expectations slightly thanks to effective cost control and lower taxes.
A Financial Times analysis of the Congo voting data suggests major fraud in the recent presidential elections. FT results show a 60% to 20% win by Fayulu, contradicting the authorities’ claim that Tshisekedi had won the vote.
