Markets
Global core bonds gained ground ahead of the ECB meeting as the recent rebound in risky assets slowed. Asian equities closed today’s session in green, but more caution kicked in as Europe joined trading. With no economic data to steer traders, EU equity indices alternate in green and red throughout the day. The German Bund moved sideways awaiting the ECB rate decision and president Draghi’s press conference afterwards. The ECB didn’t alter its policy rate (as widely expected). President Draghi said that risks remained “broadly balanced”, but added this time that the balance of risks is moving to the downside. Next, the ECB lowered its GDP forecast to 1.9% this year (vs. 2.0% previously) and 1.7% in 2019 (vs. 1.8%), while the inflation forecast was little up. The end of the APP program was officially announced, but the bank promised to keep reinvesting maturing bonds without specifying for how long. In the end, nothing really changed except a slightly more cautious tone. Draghi succeeded as markets hardly moved. The German yield curve edged lower with changes ranging from -1.3 bps (10-yr) to -2.4 bps (5-yr). Little eco data in the US as well to guide trading today, except for the jobless claims. Claims dropped from 233k in October to 206k in November but didn’t affect bond trading. US yield curve currently moves south. Changes range from -0.6 bps (2-yr) to -1.4 bps (5-yr). Peripheral spreads are close to unchanged.
Trading in the EUR/USD cross rate was an area of calm of late and the ECB policy and press conference were not able to unlock the EUR/USD stalemate. The ECB slightly revised down the 2018 and 2019 growth forecast. The ECB president described the risk to the outlook as broadly balanced, but moving to the downside. Draghi summarized the ECB assessment as ‘continuing confidence with increasing caution’. This assessment was hardly a surprise for markets. The ECB also maintains the capital key as the reference for its reinvestment policy. The fact that there was no concession at all in favour of peripheral countries maybe was also a marginal euro negative. EUR/USD trades currently in the 1.1340. So, the ECB press conference clearly isn’t a EUR/USD game-changer. USD/JPY is also gaining a few ticks. US jobless claims falling back to the a low 206 000 maybe was a marginal USD supportive, too. USD/JPY is trading in the 113.60 area.
Sterling regained some ground yesterday as markets anticipated that PM would ‘survive’ the confidence vote within her own party. This assessment turned out to be true and May’s survival removed the risk of a highly disorderly political development. The sterling rebound slowed yesterday evening, but there were still some very cautious follow-through gains today. UK PM May is heading to Brussels. However, markets (and the UK PM) are well aware that any changes to the Brexit deal will be difficult. The EU is at best prepared to give some ‘clarifications’, which almost certainly won’t be enough to please hardline Brexiteers within the conservative party. In technical trading, sterling still enjoyed some minor relief as more negative/disorderly scenario has been avoided and as the way toward a not-to-hard Brexit isn’t formally closed. However, today’s sterling gain shows no convincing momentum. EUR/GBP trades in the 0.8970 area. Some modest euro softness is probably also in play. Cable (1.2660 area) also gains a few ticks in a daily perspective.
News Headlines
The Norwegian central bank kept policy rates stable at 0.75% and reiterated its March 2019 hiking intentions. The latter was a surprise/relief to markets as they feared the central bank would postpone a second hike giving the recent volatility and severe oil price drop. The Norwegian krone jumped higher but couldn’t sustain gains.
Switzerland’s national bank held the deposit interest rate unchanged at -0.75%. The bank showed no intention whatsoever to abandon these crisis-era settings anytime soon, citing the Swiss franc’s recent strength and mounting global risks. 2019 inflation forecasts were revised to 0.5%, down from 0.8%.
