Markets
Global trading is taking a more cautious approach today even as US president Trump and Chinese Vice Premier Liu He will sign a phase 1 trade deal. Comments from the likes of US Treasury Secretary Mnuchin made clear that the execution of the deal still contains multiple hurdles and that the more profound phase 2 deal is unlikely to take place before the US presidential election. Uncertainty on trade will continue to linger, adding to a more cautious approach on risky assets. US earnings were mixed and eco data second tier. The US Empire manufacturing survey improved from 3.5 to 4.8, but the positive beat was too small to have a lasting impact. The US and German curve both show a bull flattening with Bunds outperforming. US yields decline between 0.4 bps (2-y) and 1.2 bps (30-y). German yields decline 1.1 bp (2-y) to 3.9 bps (30-y). As was the case earlier this week, European government bond auctions went very smoothly. Italy received over 44 bn of buying interest for a 30-y bond sale. The auction was priced at BTPS + 6 bp after official guidance of BTPS +7 bps. Belgium successfully sold € 6 bn of a new long 10-y fixed bond at MS -7 bps. Final books closed above 27.5 bn. 10-y intra-EMU spreads vs Germany were little changed despite big auction supply. On the FX market, EUR/USD rebounded further. The decline in core yields weighed more on the dollar than on the euro, as was often the case of late. The EUR/USD rebound accelerated during the US trading session. EUR/USD is trading in the 1.1155 area. Soft US PPI data provided a good reason for additional USD selling. The loss in USD/JPY was modest given a more fragile risk sentiment. The pair is trading in the 109.85 area.
Sterling sentiment deteriorated since last week. The post-election sterling rally already appeared to have been discounted soon after the Tory victory. Last week, BoE policy makers including BoE’s Carney came out to debate the case of a rate cut if data don’t improve soon. The end of January meeting is becoming an ever more realistic option as data point to anemic activity and low price pressures at the end of last year. UK December price data reinforced the case for a January BoE rate cut. Headline CPI was unchanged on a monthly basis, causing the Y/Y measure to ease from 1.5% to 1.3% . An unchanged reading was expected. Core CPI also drifted further away from the 2.0% target, printing at 1.4% from 1.7%. The market considered the report as some kind of ‘nihil obstat’ for a rate cut (market implied probability rises to 65%). Gilts outperform Treasuries and Bunds. The UK yield curve bull flattens with yields declining between 4.1 bps (2-y) and 7 bps (5 &10 y). Sterling extensively tested the post-election correction top near 0.86 yesterday, but the test was rejected. The CPI report triggered renewed GBP-selling, but the damage could have been worse. EUR/GBP is trading in the 0.8565 area. Cable even holds near/slightly above the 1.30 pivot on broader USD softness.
News Headlines
Russian Prime Minister Dmitry Medvedev announced his resignation and thereby that of the government just hours after president Putin gave his annual state-of-the-nation. According to Medvedev, Putin has set out reforms that will mean “fundamental changes” to the constitution and considers it only “right for the government to resign”. Putin said he favored handing over power from the presidency to the parliament, which could allow him to extend his rule after his fourth presidential term ends in 2024. The Russian ruble fell to 61.6 against the dollar following the news.
US Treasury Secretary Mnuchin said the US cannot continue to expand spending at the current rate forever. He said military and non-military spending are the cause of the deficits, which ran up to $984 billion in 2019 (4.6% of GDP) and not the tax cuts introduced by president Trump in 2017.
