Markets
Markets entered calmer water today after yesterday’s violent risk-off repositioning due to the spread of the coronavirus. The equity and (albeit to a lesser extent) yield rebound did peter out throughout European dealings but bottomed around noon and even regained momentum when US investors joined. Soft December durable goods didn’t thwart the cautious recovery, despite the series over 2019Q4 suggesting a weak contribution from investment in Thursday’s US growth figure. Headline durable goods orders jumped from -3.1% to 2.4% (0.3% expected). Details showed a huge (but probably one-off) bump in defense spending (from -35.3% to 90.2%) which more than offset the slump in nondefense aircrafts (Boeing). Every core measure disappointed however with shipments – closely watched because of its proximity to capex – printing another decline (-0.4%). US yields held near their intraday highs nonetheless. The curve bear steepens marginally with changes up to 1.4 bps at the long end. German yield changes are of a similar magnitude. Spreads in the European periphery narrow with Italy outperforming (-4 bps). Greece (-2 bps) hopes to sell €2.5bn of 15-year bonds at a final spread of 165 bps above midswap. France €5bn 2052 bond orders are said to top a record 38bn on final terms of OAT+4. Moves in FX markets were again muted. EUR/USD failed to profit neither from the risk climate rebound nor the below-consensus US data. The couple is barely holding above the 1.10-area. Technical support at 1.0981/89 is vulnerable. The sentiment turnaround whipsawed USD/JPY – currently trading just shy of the 109 level, unchanged vs. yesterday’s close.
British CBI data wasn’t too bad today with the trade sector (including wholesale and retail) projecting the best sales since February 2019. The pound wasn’t quite impressed though. EUR/GBP edged higher during early morning trade but topped out at 0.847. At 0.846 against the euro (currently), sterling is actually trading relatively strong in the run up to the Bank of England meeting on Thursday. The rising odds of a rate cut (50% as of today) following mostly poor economic data last week didn’t affect the pound though, on the contrary. But with the BoE looming, investors have stopped (at least temporarily) accumulating sterling.
News Headlines
Hong Kong stepped up measures to slow the spreading of the deadly coronavirus, which the WHO yesterday upgraded from a medium global risk to a high one. HK Chief Executive Carrie Lam announced the closure of border checkpoints and restrictions to flights, trains and ferries from the mainland. She added that China is suspending visas for visitors to the territory.
The ECB announced that 6 out of the 109 bank evaluated last year fell below the central bank’s capital requirements. The undisclosed banks have been told to take action to fix the shortfalls. The ECB demanded banks to hold a common equity Tier 1 ratio of 10.6%. The overall CET1 levels requested by authorities, including the systemic and countercyclical buffers, which are not set by ECB Banking Supervision, rose to 11.7%, due to a 10 bp increase in the countercyclical buffer and a 10 bp increase in the systemic buffers.
The Hungarian central bank (MNB) kept its main policy rates unchanged today. Following a temporary rise, CPI is expected to return to the 2.5%-3.5% tolerance band by the end of Q1 2020, and then to stabilize at the 3% inflation target in the second half of the forecast horizon. Risks to inflation are symmetric. In the coming years, Hungary’s GDP growth is likely to be slightly higher than earlier projected. The necessity of further measures will be determined by the persistent change in the outlook for inflation (March), which will be monitored closely by the Monetary Council.
