Markets
Global core bonds reap substantial gains today. US Treasuries still faced low volumes today as many US investors take a long weekend after Thanksgiving. Risk sentiment initially improved on European equity markets, with all major indices opening in green. The German Bund mirrored the move and opened lower. That didn’t last very long as German/EMU PMI’s came out disappointing. The Composite PMI for the EMU decreased from 53.1 to 52.4 in November. Consensus pinned a modest decrease to 53.0. The German Bund contract reversed its initial losses and jumped higher. European equity markets took a step back as well and are currently trading with losses. US Treasuries moved higher as well throughout the day, though at a slower pace. Oil prices stabilized over the previous days around $63 but nosedived again today to edge below $60/barrel for the first time since January 2017. Donald “I want to see oil prices even more down” Trump seems to be getting what he asked for. The falling oil prices make investors adjust inflation expectations downwardly, putting even more pressure on core yields. Both the German and US yield curve bull flatten with yields declining up to -3.5 bps (30-yr) for Germany and-3.6 bps (30-yr) in the US. The US 10-yr yield is currently testing the 3.05% low of October and is testing the technical 3.0%-3.05% area support. A relative quiet day concerning the Italian budget keeps the Italian 10-yr yield spread over Germany stable at 308 bp.
US markets reopened after Thanksgiving today but there were few eco data to guide USD trading. In Europe, the first estimate of the EMU November PMI’s were scheduled for release. The report has often only a limited impact on markets and on EUR/USD trading in particular. However, this time was different. EMU and especially German PMI’s (again) missed the consensus by a significant margin, suggesting a further loss of momentum in the EMU economy. The outcome also contradicted the recent assessment of the ECB that part of the slowdown in Q3 was due to temporary factors. European yields and the euro declined. EUR/USD dropped from the 1.14 area to fill bids in the 1.1340 area. Sentiment on risk remained fragile and even worsened as US traders joined the action. However, this time the dollar continued to outperform the euro in the wake of the poor EMU PMI’s, despite US equity underperformance. EUR/USD is trading in the mid 1.13 area. Changes in USD/JPY were again very modest (Japanese markets were closed today). The pair lost a few ticks but continues trading tight ranges (currently 112.75 area).
Sterling showed a mixed picture and mainly followed the broader trends in the euro and the dollar. Cable reversed part of yesterday’s gain. At the same time, EUR/GBP also lost some ground, mainly due to the overall decline of the euro after disappointing EMU PMI’s. There was still some political noise ahead of this Sunday’s EU summit to approve the EU-UK Brexit deal. Spain disagreed on the approach with respect to Gibraltar. However, investors basically held the view that the Withdrawal agreement and the political text on the future relationship will be approved. If the process turns out as expected, the focus will shift to the approval in UK parliament. EUR/GBP is trading in the mid 0.88 area. Cable is trading in the 1.2825 area.
News Headlines
Rating agency Moody’s warned that a “significant escalation” of the conflict between Italy and the EC would be negative for Italy’s recently downgraded credit rating. A potential escalation of the standoff could increase funding costs to “unsustainable levels” and threaten growth. Moody’s already sees downside risks to the economic outlook.
Canadian headline inflation increased by 2.4% YoY (0.3% MoM) in October vs. 2.2% (0.1%) expected. Core measures (2.0% YoY) matched expectations but September data was revised downwards (1.9%). September retail sales grew 0.2% MoM after a weak August.
