Markets
Global core bonds lost ground today as risk sentiment recovered. US equities lost up to 2% yesterday on fading trade optimism, but the sentiment turned overnight. US top economic advisor denied trade talks with China were cancelled and said next week’s top level trade talks will be “determinative”. Meanwhile, China’s central bank confirmed new monetary stimulus. Q4 Corporate earnings printed generally above expectations. EU equities first opened lower but recovered since to trade in green territory at the time of writing. With literally no economic data to guide investors, the uptick in sentiment weighed on core bonds with US Treasuries underperforming German Bunds. The German yield curve moves cautiously higher with changes in the range of +0.3 bps (10-yr) to +0.6 bps (2-yr). Tomorrow’s vote in the US Senate on legislation to reopen the government probably won’t pass, but at least both parties are discussing possible way outs. The US yield curve steepens with changes between +0.8 bps (2-yr) to +2.8 bps (30-yr). Peripheral spreads over the German 10-yr yield are stable. Investors are awaiting the ECB meeting and the EMU PMI’s for January, both scheduled for tomorrow.
There was little high profile news to guide trading in the major USD cross rates. USD/JPY touched an intraday peak near 109.80 as the BOJ downgraded its inflation forecast. USD/JPY lost (temporarily) part of Asian gains as European equities opened in risk-off modus. The pair drifted back to the mid 1.13 area. Risk-sentiment improved again later in the session. This change in the mood on global markets was no big game-changer for FX trading, but it blocked a further EUR/USD decline. The pair rebounded in lockstep with equities. Unlike stocks, however, EUR/USD couldn’t maintain gains as the widening US/German spreads also triggered dollar buying by the first US traders. The couple is hovering near intraday lows but holds the line for now, trading at the 1.1360 area. Higher US yields resulted in a knee-jerk USD/JPY uptick, which set a new intraday top in the high 109 area.
Sterling trading was still driven by growing investor hope that a no-deal Brexit can be avoided. In the same narrative, Brexit is expected to be delayed beyond the March 29 deadline. A brexit delay won’t solve the fundamental issues causing the political division in the UK. So it is far from sure that the uncertainty will disappear immediately in that scenario. However, political heat might cool down for a while. This is currently enough for FX markets to take a more positive approach on sterling. EUR/GBP extends its decline and is trading in the 0.871 area. High profile support in this cross rate is seen in the 0.8656/0.8621 area. Cable also jumped north of the 1.30 mark. CBI order data softened in January (from 5 to ‑1), but had no noticeable impact on sterling trading.
News Headlines
Italy’s finance minister Tria assured Rome won’t overshoot its 2019 budget deficit target and sees no need for any corrective measures. It is expected the 2.04% target will be exceeded as the country’s central bank said that GDP probably contracted at the end of last year, thereby lowering growth for the whole of 2018 to a mere 0.6% vs. 1.0% projected by the government.
Pressure on the Romanian leu eased somewhat today. The currency crashed on escalating concerns rooted in the Romanian government’s decision to impose a bank levy to boost budget income. The levy is based on total assets and is tied to the money-market rate. Markets fear the move could result in reduced lending and thwarts the tightening cycle of the country’s central bank.
