Markets
Global core bonds lost ground today. German Bunds underperform US Treasuries. The downleg started around European noon when China Central Television reported that the country would firmly implement major reforms and deepen supply-side structural reform. Economic data were mixed. German ZEW investor sentiment dropped more than expected, from 15 to 11.1, but expectations for medium-term economic developments are less pessimistic (-3.6 from -13.4). Final January US durable goods orders faced a minor downward revision. Positive risk sentiment on stock markets and rising oil prices weighed somewhat on core bonds as well. Brent crude tested the $68/barrel cycle high. OPEC yesterday cancelled its April meeting, thereby extending production cuts at least until June. The US yield curve bear steepens at the time of writing with yields adding 1.2 bps (2-yr) to 2.8 bps (30-yr). German yields shift 0.7 bps (2-yr) to 3.6 bps (10-yr) higher. 10-yr yield spread changes vs Germany are close to flat.
EUR/USD maintained the tentative upward bias from last week and earlier this week. The ingredients for the rise were little changed. Investors are avoiding excessive USD long exposure as they expect the Fed to stay cautious to engage on further policy normalization at tomorrow’s policy meeting. A higher oil price and new up-leg on equity markets also weighed on the dollar and supported the single currency. ZEW economic confidence was mixed, but an upward surprise in the expectations component of the report supported investor hopes that the worse might be over for the German (and EMU economy). German bunds slightly underperformed US Treasuries, narrowing interest rate differentials in favour of the single currency. EUR/USD retested yesterday’s correction top in the 1.1360 area, but no sustained break higher occurred. The pair is currently changing hands in the 1.1345/50 area. In Asia and early in Europe, USD/JPY didn’t find a clear trend as Asian investors took a wait-and-see approach. Throughout the day, the combination of higher core yields and renewed equity buying finally weighed on the yen. USD/JPY returned to the mid 111.50 area.
The sterling trading experienced a calm before a potential next Brexit storm after Thursday’s EU summit, probably marking the final countdown to the March 29 deadline. There were all kinds of rumours/headlines of talks behind the scene that should give the UK a last opportunity to vote a deal next week. However, the exact content of the proposals and their chances to get approval from the EU and/or the UK parliament remain highly uncertain. EUR/GBP hovered in a rather tight sideways consolidation pattern roughly between 0.8535/0.8570. UK January labour data were remarkably strong (3M/3M net job creation at 222 000). However, (GBP) traders clearly don’t want to draw big conclusions for BoE policy as long as uncertainty on Brexit remains as elevated as it is right now. EUR/GBP is trading in the 0.8565 area. Cable filled offers north of 1.33 but dropped back to the mid 1.32 area.
News Headlines
It has never been the Riksbank’s aim to weaken the Swedish krona, Deputy Governor Skingsley reiterated today, speaking to reporters. Her remarks add to the recent flurry of Riksbank talk signaling that the current krona weakness probably has gone far enough. The Swedish krona strengthened on the comments to EUR/SEK 10.43.
Germany’s ZEW confidence indicator showed investors were less pessimistic about future economic developments in March (climbing from -13.4 to -3.6 vs. -11 expected) as US/Sino trade talks are making progress and UK’s chances of crashing out were deemed diminishing. The current conditions series declined further however, from 15.0 to 11.1. A smaller decrease to 13.0 was expected.
