Markets
Global core bonds trade mixed. Risk-sentiment improved during US trading yesterday and that vibe continued in Europe today. Equities edged higher and global core bonds moved south. German ZEW expectations surprised on the upside as well. The cautious uptick in sentiment received some tailwind as China signaled goodwill in the trade talks with the US as it considers a US car tariff cut. The German Bund made a counter-intuitive move higher and paired its intraday losses. The German yield curve steepened with changes ranging from -1.6 bps (2-yr) to +1.1 bp (30-yr). The US yield curve edges higher, with changes varying between -1.3 bps (30-yr) to +2.0 bps (2-yr). Meanwhile, French PM Macron promised a series of measures in an effort to calm the ‘gilets jaunes’ that has put France in a deadlock for weeks. Those concessions don’t come cheap, as a French financial journal estimated that extra expenses could mount up to €11bn and a deficit widening to 3.5% in 2019. The French 10-yr yield spread over Germany increases to 45 bps, the largest since last year. The French deficit widening gives the Italian government some more leverage in negotiations with the EU. Italian media reported that the Italian government won’t go lower than a 2.2% budget deficit in 2019, leaving discussions with the EU unresolved. However, the Italian spread over Germany remains stable in the 285-290bps zone.
EUR/USD staged a decent recovery initially. An improved risk climate and a better than expected German ZEW supported the common currency during European trading hours. The currency pair slipped around noon however. We see several reasons, the first one technical is nature as EUR/USD’s reversal took place after the pair touched the 1.14-mark. The move coincided with the trade-weighted dollar clearing the 97-hurdle. Stronger than anticipated headline/core US PPI data also helped the dollar recoup previous losses. Third, Trump said China is cutting its 40% trade-war tariffs on US cars, triggering a relief in the dollar, who had been weighed down by the US/Sino conflict lately. Finally, French and Italian spending plans are potential euro negative. EUR/USD is trading at around 1.134, down from 1.1356 this morning. USD/JPY (113.3) is upwardly oriented in a narrow trading range.
One day after she pulled the brexit vote (scheduled for today), PM May is already on European soil, trying to secure concessions on the deal from EU leaders. One major stumbling block that would have likely resulted in a Parliamentary rejection is the Irish backstop. British MP’s fear there’s no way out of the EU/UK customs union when the backstop is triggered. May now seeks legally binding assurances to avoid being tied indefinitely. EC President Juncker said EU leaders will refuse to renegotiate however. At best there could be some clarifications on the text. A new date for MP’s to cast their ‘meaningful vote’ on the tweaked deal hasn’t been specified yet, though the UK government set January 21 as a deadline. The pending brexit stalemate thus returns to the forefront, preventing a significant sterling recovery from yesterday’s slap. The pound did find some support in a strong labour market report, but remains well above the EUR/GPB 0.90-handle. Cable edges back above the 1.26-mark.
News Headlines
A strong UK labour market report failed to inspire sterling. Employment change increased by 79k 3M/3M in October (vs +25k consensus) with the employment rate rising to the highest level since 1971 (75.7%). Wages increased at the fastest pace since 2008 (3.3%), outpacing UK inflation (2.4%) and increasing UK households’ disposable income.
US eco data printed mixed with higher than expected producer price inflation in November (0.1% M/M for headline and 0.3% M/M for core) and a bigger than feared setback in NFIB small business optimism (104.8 from 107.4). German ZEW investor sentiment declined more than forecast in December (45.3 from 58.2), but the forward looking expectations component rose (-17.5 from -24.1), beating consensus.
