Markets
Global core bonds lost ground today. With US markets closed in honor of former President Bush, investor focus was mainly on Europe. Asian and European equities edged lower this morning, though at a slower pace than US equities yesterday. German Bunds already rallied higher during US trading hours, so they opened only marginally higher. There was plenty of economic data today, but generally second-tier in nature. The final Eurozone PMI’s were slightly better than earlier readings, while retail sales were mixed. Both didn’t influence trading today. EU equities recovered slightly throughout the day, leading German Bunds down. Italian BTPs moved higher after Deputy PM signaled that “the climate is changing” in budget talks with the EU. Add slightly stronger than expected Italian PMI’s and you see why Italian assets outperformed. The Italian 2-yr yield drops to 0.59%, the lowest level since July. German Bunds lost marginal ground throughout the day. German yield changes range from +0.3bps (2-yr) to +1.0 bp (10-yr). Peripheral spreads tighten with Greece (-9 bps), Italy (-9 bps) and Spain (-4 bps) outperforming.
FX markets caught their breath after yesterday’s volatile session with US markets closed. European equities still struggle but losses are much more contained compared to the slaughter in the US yesterday. EUR/USD finds itself well bid as risk sentiment gradually improves. The common currency also found early support in slightly better than expected (final) EMU PMI’s. The recovery of Italy’s services PMI back into (yet mildly) expansionary area (> 50) is worth mentioning. At the same time, Italian budget headlines suggest both the government and the EC are slowly but steadily closing in on a compromise. It resulted in a narrowing of the Italian/German spread which in turn helped the euro gradually higher after yesterday’s sudden decline. EUR/USD is changing hands at 1.136 at the time of writing. USD/JPY hovers close to the 113-handle, up from 112.70 this morning.
The pound started on the right foot after being whipsawed yesterday. Markets saw chances of a no-deal Brexit reduced since Parliament won the vote to take control of Brexit if May’s deal is voted down. Sterling even shrugged off the worst (services 50.4, composite 50.7) PMI confidence since the aftermath of the 2016 referendum vote. The publication of the attorney general’s full legal advice held no surprises. He warned – as expected – for an “enduring” backstop risk. Sterling’s move quickly ran into resistance again however. Markets are braced for the second day of the parliamentary debate that started around noon. Brexit headlines/developments pile up so fast it leaves sterling traders completely bewildered. EUR/GBP trades close to 0.89 but without a clear direction. Cable also lost some intraday momentum, filling bids at 1.272. We expect this volatile trading pattern to continue in the next few days.
News Headlines
Rating agency Fitch keeps its global growth forecasts unchanged in 2018 and 2019 with growth peaking at 3.3% this year before sliding to 3.1% in 2019 and 3% in 2020. Trade risks remain a key downside. They expect the Fed to hike policy rates 3 times next year, but interestingly no longer expect an ECB rate hike in 2019.
The Swedish services PMI surged from 56.4 to 62.2 in November, reaching the highest level since December last year. The combination of strong PMI’s adds to bets that the Riksbank will hike interest rate for the first time this cycle at its December 20 policy meeting. EUR/SEK dropped below 10.20, the lowest since June.
The Bank of England showed willingness to lower the counter-cyclical capital buffer from 1% to 0% if the UK economy would suffer a huge setback after Brexit. It took similar action after the June 2016 Brexit vote. Such cut would allow banks to absorb £11bn in losses and to lend as much as £250bn to UK households and businesses.
