Markets
The reflation trade returned after never really having left. The Senate race in Georgia at the moment has one seat being called in favour of the Democrats. Votes for the second are still being counted. With about 98% of total votes counted, the Democrat Ossoff has a very slim lead (0.36%) over Perdue, making it still too close to officially call. Yet markets are betting on a Democratic sweep which could set the stage for more fiscal stimulus and possibly more regulation, in particular for big tech. The result is a classic cyclical equity rotation from tech (Nasdaq opens 1% lower) into industrials, financials and energy. European stocks march about 1% higher. Core bond yields soar. The US yield curve bear steepens with yields up 1 bp (2-yr) to 10 (!) bps (30-yr), also pushed higher amid oil (and other commodities) eking out a further increase after surging yesterday on an unexpected OPEC+ production cut. A very disappointing ADP job report (-123k vs. +75k expected) only had a temporary impact. The US 10-yr yield is testing the 1% for the first time since March as both real yields and the 10 year breakeven rate are on the rise. Expected inflation over a 10-year time frame is with 2.34% at a new cycle high. The German bund outperforms, with yields changes varying from 1.2 bp (2-yr) to 2.7 bps (30-yr). European final PMIs were revised downwardly (49.1 vs. 49.8), led by a downward revision in Germany’s services PMI to 47 (from 47.7) with the final reference period stretching beyond the tighter lockdown measures mid-December.
Same old on FX markets. The US dollar continues to trade rather heavy against the euro. Risk-on, anticipation on more US fiscal stimulus having to be funded at very low rates as well as rising commodity prices is a triple reflationary blow to the USD. EUR/USD initially ventured well north of 1.23, touching an intraday high at 1.235 before retreating in the wake of the ADP report and as the first US investors started joining. The currency pair is now hovering around the 1.23 big figure. Yesterday’s break below USD/JPY 103 does not meet with follow-up losses today. The pair even regains 103(.22) in lockstep with the intraday EUR/USD reversal. Cyclical currencies including the Aussie and kiwi dollar top the G10 scoreboard. In EM currencies, the Turkish lira takes the lead, hitting important support at 7.34 USD/TRY (200dMA). In CE countries, the zloty and Hungarian forint outperform the Czech krona. The pound sterling trades weak today, losing against both the euro and the dollar despite an overall constructive sentiment. The lockdowns, the lack of clarity on financial services trade with the EU and the lingering possibility of negative rates might all weigh on the UK currency. EUR/GBP advances from 0.902 to 0.907 currently. Cable declines from 1.362 at the open to 1.356.
News Headlines
The rally in several agricultural commodities continues unabatedly. Corn in Chicago touched the $5 barrier, the highest level in more than six years. Soybeans also rose to the highest level in 6 ½ year. Dry weather conditions in South-American regions like Argentina and some parts of Brazil are raising supply concerns. A suspension of Argentina corn exports to ensure adequate domestic supply also added to this supply concern. Wheat is also trading near a six-year peak. If sustained, the rise in those commodities might over time translate into higher food price inflation.
The US December ADP labour report showed an unexpected 123k decline in private payrolls. The market expected a modest rise of about 75K. The number of people employed in the goods producing sector declined 18k. Services lost 105 000 jobs with leisure and hospitality (-58K) and trade & transport (-50k) suffering most from the impact of the new corona wave. Job losses also mainly occurred at large companies. The final US Markit Services PMI also showed a loss of momentum at 54.8 from 55.3. The composite PMI declined slightly from 55.7 to 55.3. This was to lowest reading since September, but the index still recorded the sixth consecutive month of expansion.
