Markets
The dollar can’t fight the law of gravity and sinks deeper into the black hole which opened up after formal technical breaks early this week. DXY 91.75 and EUR/USD 1.2011 are already long forgotten with the siren song of 2018 (dollar) lows, respectively at DXY 88.25 and EUR/USD 1.2555, echoing louder and louder. Dollar weakness was the only trading theme which really lasted yesterday with stock markets ending near unchanged and core bonds gaining some ground. The US yield curve bull flattened with yields shedding 0.9 bps (2-yr) to 3.2 bps (30-yr). A decline of US real yields is fully responsible for the move with US inflation expectations remaining at their highest levels since May 2019. The German yield curve moved in similar fashion as the US one with yields dropping 2.2 bps (2-yr) to 3.6 bps (30-yr). 10-yr yield spread changes vs Germany ended broadly unchanged.
Brent crude rallied to near $50/b this morning after OPEC+ compromised on slowly reversing production cuts next year (see below). Core bonds are a tad off yesterday’s best levels with the greenback not showing any signs of improvement yet. Asian stock markets have a minor positive bias with South Korea continuing its outperformance. Today’s eco calendar mainly centers around US November payrolls. Consensus expects a 475k net job gain with the unemployment rate moderating from 6.9% to 6.8%. Signals from the US job market have been mixed this week. On the one hand, the employment gauge in the manufacturing ISM posted its first drop since April and ADP employment growth disappointed (307k). On the other hand, employment increased in the services ISM while weekly jobless claims fell back to the 700k barrier following two consecutive rises. Those mixed signals suggest some caution for today’s reading. We don’t fight the ruling trend on the FX market. The dollar remains in the soft spot and so far there are little to none signs emerging from short covering. US Democratic and Republican leadership is narrowing in on an additional fiscal boost before the end of the year. The carrot-and-stick approach holds up US inflation expectations. From a euro-perspective, we fear that the ECB’s “last dance” (final easing shot this cycle) risks triggering by default euro strength.
EU and UK negotiators still hope to land a brexit trade deal by the end of this weekend even after French President Macron hardened his stance on fisheries last minute (yesterday evening). Discussions could well go into overtime again with next week’s EU Summit looming. Sterling’s recovery bumped in the EUR/GBP 0.90 mark with the pair currently changing hands in the 0.9025 area. We expect the UK currency to remain in the defensive.
News Headlines
After several days of negotiations, OPEC + reached an agreement on oil output cuts from January 2021 on. OPEC and Russia will reduce current production cuts of 7.7 million barrels per day by 500 000 million bpd. Before the start of the current round of negotiations it was expected that the group would delay any easing in the production cuts till the end of March. OPEC+ will now meet on a monthly basis to manage further changes in output. Despite the small rise in production for January, oil extended its rebound after the announcement of the agreement. Brent oil is coming within reach of the $50 p/b level.
US Members of Parliament reached an agreement on legislation that will oblige the US government to take sanctions against Turkey as it has bought a Russian missile system. Companies that are linked to the Nord Stream 2 pipeline project will also be penalized. Sanctions against Turkey will have to be implemented within 30 days after the approval off the law. In this scenario, the President still will have to impose the sanctions before the 20 January transfer of power. EUR/TRY returns to 9.50.
