Markets
Global core bonds lose ground today in a day characterized by a shaky risk sentiment. News that US prosecutors are advancing their investigation in China’s Huawei Technologies for allegedly stealing trade secrets weighed on investor sentiment this morning. European equities lost ground. In a day without any (EU) economic data important enough to guide investors, one would expect that the deteriorated sentiment supports core bonds. However, German Bunds are losing ground, pushing the German yield curve higher with changes in the range of +0.4 bps (30-yr) to +1.4 bps (5-yr). The support for sentiment yesterday by stronger than expected Q4 results (Goldman Sachs, BoA) was annulled today as first the Société Générale and later the Morgan Stanley result disappointed. Just before US openings, solid jobless claims and a strong Philly Fed Business Outlook reading positively surprised investors. The data triggered a fall in both German Bunds and US Treasuries. The US yield curve moved higher with the exception of the long-end of the curve. Changes vary between -0.2 bps (30-yr) to +1.9 bps (5-yr).
There was very little to report on USD trading today. The USD rebound from earlier this week stalled. The eco data were not able to steer USD trading. The US weekly jobless claims (213 k) and the Philly Fed outlook were OK (slightly better than expected), but didn’t help the dollar this time. Ongoing uncertainty on the impact of the government shutdown on growth might be in play. Swings on interest rate markets were also too small to inspire any directional price action in in the major USD cross rates. EUR/USD set a minor correction low for the week, but soon returned to the 1.14 area. Is this an indication that the EUR/USD correction has run its course? USD/JPY is little changed in the 108.85 area.
Sterling extended its recent rebound today. UK PM May started talks with MP’s which she hopes might lead to a new brexit proposal that will be presented in Parliament early next week. However, with Labour leader Jeremy Corbyn boycotting the talks, a break-through anytime soon is unlikely. Still, part of the market thinks that chances are rising for a delay of Brexit, for a new referendum or even for no Brexit at all. This is all about (perceived) probabilities. However, for now it is enough for investors to (gradually) reduce sterling shorts or even to consider some guarded sterling long exposure. As we don’t expect this brexit process to go really smooth in the coming days, we stay cautions on sterling long exposure. That said, avoiding the worst case scenario of a hard Brexit at this stage by some investors is seen enough a reason turn a bit more optimistic (or is it less negative?) sterling. EUR/GBP declined to currently trade in the 0.8825 area. Cable returned to the 1.29 area.
News Headlines
The South African central bank kept rates unchanged at 7.5% today. The bank cut inflation expectations as oil prices dropped and a stronger currency but warned risks remain to the upside. Growth for 2019 was revised downwardly to 1.7% (from 1.9%) as weak consumer and business confidence weigh. The rand loses almost 1% vs. the dollar.
US data beat consensus with jobless claims falling 3k (to 213k) while an increase to 220k was expected). The Philly Fed business outlook (January) recovered from 9.1 to 17.0 vs. 9.5 anticipated. New orders picked up but the employment component fell to the lowest since September 2017. General business conditions in six months from now are expected to improve further after the indicator slipped in November last year to the lowest since April 2016.
The Hungarian forint rallied for a second straight day as markets anticipate monetary tightening by the central bank soon. The bank’s deputy governor flagged the start of normalization on Wednesday if core inflation reaches 3%. The gauge had already risen to 2.9% in December, fuelled by consumption and strong wage growth.
