Markets
German Bunds remain steady today as US markets are closed due to Thanksgiving. Yesterday’s risk improvement didn’t continue today. Asian markets closed mixed this morning. European equity indices moved south at opening. With US markets closed and no economic data to steer trading, investor sentiment remained the main market driver. German Bund opened higher on safe haven flows. Some positive news/rumours reversed the downward trend before noon. European Council president Tusk announced that a draft agreement for Brexit had been sent to the member states. UK PM May hailed it “the right deal”. 5SM Deputy PM Di Maio signaled he might be open to make limited modifications to the Italian budget, pushing Italian BTP’s higher. The Italian retail bond sale closed at 1.3 billion euros, the lowest level since 2012. The ECB published its account of the October policy meeting. It acknowledged that “uncertainties and fragilities” impact the economy but agreed that the euro zone’s domestic strength will prevail. German Bunds paired their opening gains and hover around opening levels at the time of writing. German yields are moving in a mixed fashion with changes ranging from +0.2 bps (2-yr) to -1.2 bps (10-yr). Peripheral bond spreads were steady with only Greece outperforming (-5 bps).
Yesterday’s last minute dip in US equity markets revealed a fragile investor sentiment. This persisted during Asian and European trading hours. We shouldn’t draw too many conclusions from today’s price action however, given that the US is closed in observance of Thanksgiving. That said, European stock markets do flash red again after a short-lived rebound on Wednesday. The slightly negative sentiment didn’t prevent the euro from trading with a positive bias. The common currency was supported by easing Italian tensions as both Italy and the EC are still open for dialogue. EUR/USD later spiked temporarily on reports that the EU and UK reached an (at least political) agreement concerning the future ties (see below) but erased those gains soon after. The pair currently stabilizes close to the 1.14-handle, up from 1.1380 this morning. The trade weighted dollar (DXY) drifts further down in the 96.5 area. USD/JPY is floating clueless in a narrow 112.90-113.10 range.
Brexit is the main driver for sterling already for quite some time and that wasn’t different today. EUR/GBP initially hovered in the 0.8920 area early in the session as markets awaited the next steps the EU-UK brexit sage. Toward the end of the morning session, the EU and the UK announced that they reached an agreement on a political declaration on what their future relationship will look like. The agreement also pulled the trigger for a EU summit on Sunday where the EU member states have to give their fiat on this political declaration. Sterling jumped slightly less than one percent higher upon the announcement of the agreement. There was some uncertainty afterward as some details still have to be settled. However, sterling held its gains as it become clear that a summit will take place in any case. EUR/GBP trades currently in the 0.8855 area. Cable traded temporary north of 1.29, but is currently changing hands in the high 1.2880 area. Sterling profited today as another, highly symbolic hurdle in the brexit process has been conquered. That said, the focus will soon return to the political scene in the UK. Question remains whether this part of the story will remain sterling supportive.
News Headlines
The South-African central bank (SARB) raised its policy rate for the first time since 2016 by 25 bps to 6.75%. The board was entirely split on the decision with governor Kganyago’s vote decisive. The SARB presented a gloomier eco and inflation outlook, underlining the SARB’s difficult decision. Risks for the rand are omnipresent. USD/ZAR fell to the lowest level since mid-August.
