Markets
Global (equity) investors continued their repositioning toward riskier assets as both Iran and the US signaled they don’t want recent mutual attacks to escalate into a long-lasting military conflict. Global equities continued the rebound that already unfolded yesterday. Several European equity indices including the DA and the EuroStoxx 50 are setting new ST peak levels and all-time record levels are within reach. The three major US indices open at all-time record levels. In line with recent price action, the moves on the bond markets were moderate compared the record race of equites. Core US and European yields erased a big part of the Iran-driven decline yesterday. However, moves in core bond markets were very modest today. As said, this divergence isn’t new. In addition, central bankers from all major central bankers maintain rhetoric that ample monetary stimulus is still warranted and that they can ease policy further if downside risks to growth or inflation were materialize. In this respect, BoE’s Carney in a speech said that the BoE is still debating the merits of further stimulus and the that bank has still ample room to act. Fed Clarida in a speech confirmed that the Fed policy is appropriate. Inflation is expected to move to 2%, but the Fed governor still sees downside risks. On the money market tensions, Clarida said that the Fed may gradually transition away from active repo’s, but at the same time indicated that some repo’s might still be needed at least through the April tax payments. So, central bank comments at least didn’t provided any triggers for a sharp/accelerated rise in bond yields. US and German yields are again rising between 0.5 and 2.2. 10-y intra-EMU spreads with Germany continue to narrow, supported by the overall positive risk context. Italy outperforms (-5 bp).
On the FX market, the USD/JPY continues its ‘risk-rally’. The pair is nearing the 109.50 level. EUR/USD held a tight range today but remains in the defensive. The pair tested the 1.11 big figure, but no follow-through losses occurred. The pair is currently little changed compared to opening levels, trading in the 1.1110 area.
Over the previous days, EUR/GBP held a tight range close to 0.85 level. Overall euro softness yesterday pushed the pair below this big figure. Today some sterling softness kicked on dovish comments from BoE’s Carney. The BoE governor acknowledged recent sluggish performance of the economy and sub-target inflation. The BoE will closely monitor a return of confidence after the 12 December election. Even so, the bank is contemplating the merits of additional stimulus. BoE’s Carney also indicated that BoE’s toolkit of conventional and unconventional measures give policy space comparable of 250 bp rate cuts as used in pre-crisis cycles. It is far from sure that the BoE will already use part of the this space at the 30 January policy meeting. Even so, the dovish Carney comments trigger some sterling selling. EUR/GBP is trading in the 0.8515 area. Cable is changing hands near 1.3040.
News Headlines
China’s vice premier and top Sino-US trade negotiator Liu He will travel to Washington next week to sign the phase one trade accord, the Chinese commerce ministry announced. The interim trade deal was reached last month and is likely to cut tariffs and boost Chinese purchases of US farm, energy and manufactured goods. Additionally, the accord is expected to address intellectual property flare-ups.
US jobless claims dropped to a five-week low of 214K in the week ended 4 January, markets expected a reading of 220K. The better than anticipated print indicates solid labor market amid easing trade tensions and signs of a stabilizing global outlook. Continuing claims, an indicator of ongoing unemployment, jumped to 1803K (consensus at 1720) in the week ended 28 December, reflecting large pick-ups in jobless claims in prior weeks.
