Markets
Global core bonds were mixed to little changed today as the continued uptick in risk sentiment weighed on core bonds. German industrial production fell in November for the third time in a row and suggests the economic slowdown observed in Q3 will not be temporarily. Next, confidence indicators in the Eurozone disappointed as it declined more than expected in December. However, weaker than expected economic data couldn’t bring down investor sentiment. The German yield curve edged marginally higher with changes in the range of 0.7 bps (2-yr) to 1.0 bp (10-yr). President Trump will speech tonight “on the humanitarian and national security issue” as he still seeks financing for his wall on the US-Mexican border, which still keeps the US government (partially) shut. In the meantime, he again expressed his discontent with the Federal Reserve as it raised interest rates too fast. Business optimism among small US companies decreased slightly in December to 104.4 (down from 104.8), but beat market expectations. The US yield curve is bear flattening with changes in the range of +0.3 bps (30-yr) to + 2.8 bps (2-yr). Peripheral bond yields hardly move on today’s supply glut (issuances in Germany, Netherlands, Austria and Belgium) with only the Italian spread over the German 10-yr yield dilating again (+ 4bps).
Trading in EUR/USD and other major USD cross rates was mainly technical in nature. The (trade-weighted) dollar bottomed after the decline in the wake of Fed’s Powell’s comments on policy flexibility last week. This morning, it looked like a further USD rebound/euro losses were possible. EMU eco data (German production and EC confidence indicators) disappointed and suggested a further erosion in the Q4 economic momentum. However, EUR/USD stabilized in the mid 1.14 area. A test of the USD/JPY 109 area was also rejected. The US NFIB small business confidence declined less than expected. It wasn’t a decisive factor for USD trading, but maybe it helped to ease investor worries on a US slowdown. The dollar tried another upside test. EUR/USD is trading in the 1.1430/35 area. USD/JPY is changing hands in the 108.80 area. Even so, the USD gains remain modest. FX markets are now looking forward to the (positive) outcome from the US-China trade talks and to US president Trump’s address on the financing of a the wall between the US and Mexico.
Sterling showed no clear trend today. Recent (technical) rebound petered out as the political debate on Brexit returned the forefront. The Parliamentary vote on the UK government’s Brexit deal is scheduled for January 15. There were rumours that the UK is still trying to get a better deal for the EU, but for now there is little evidence that the deal will get a majority in Parliament. Political visibility on the Brexit process remains as low as it was and this continues to prevent outright directional position taking in the major sterling cross rates. EUR/GPP regained a few ticks and is trading in the 0.8980 area. Cable (1.2730 area) ceded slightly ground, mostly due to today’s USD rebound.
News Headlines
European data printed weak. German industrial production declined for a third straight month in Nov. (-1.9% MoM, -4.7% YoY) with a downwardly revision of last month’s data. The EC confidence indicator stranded at 107.3 (vs. 108.2 expected) in Dec., down from 109.5. Forward looking components show little reason for economic optimism.
Brazil’s freshly sworn in right wing administration lead by Jair Bolsonaro plans to privatize or liquidate about 100 state-run companies. The decision would fit the government’s aim to reduce the size of the state in order to close fiscal deficits, while attracting private investment into the country.
Italy’s government stepped in to support Banka Carige, which recently fell under ECB administration after it failed to raise capital. The country’s Treasury will guarantee bonds issues and any funds it might borrow from the Bank of Italy. The government’s decision is remarkable given 5SM’s fierce criticism towards past state interventions.
