Markets
Global core bonds lost ground today as investor sentiment remained constructive. Yesterday’s UK Brexit vote was already discounted. In the meantime, China repeated its pledge to support he Chinese economy and ECB chairman Draghi said even though the momentum is slowing, he doesn’t expect the euro zone economy to fall into a recession. With no important eco data on the calendar today, risk sentiment stayed positive with EU equities cautiously edging higher. German Bunds couldn’t maintain the upward momentum of late and declined. A somewhat soft 30-y auction initially supported the move, but some of the losses were paired after lunch. The German yield curve is edging higher with changes in the range of +1.6 bps (2-yr) to +2.1 bps (30-yr). The US eco calendar was also empty due to the ongoing US government shutdown. Only the NAHB Housing Index is something to watch, as a disappointing result could strengthen worries about a slowdown in the US housing market. The US yield curve moves higher with changes varying between +2.0 bps (2-yr) to +2.7 bps (10-yr). Italian BTP’s rallied in the wake of yesterday’s successful bond syndication, pushing Italian 10-yr yield 9.3 bps lower. The spread over the German 10-yr yield tightened 11 bps.
The dollar remained well bid today, extending gains against the euro and the yen. Markets apparently see the US economy as more resilient to multiple global headwinds compared to EMU despite uncertainty on the impact of the US government shutdown. This is visible in US equity outperformance, a gradual re-widening of the US/German (EMU) interest rate differentials and USD outperformance this week. EUR/USD slipped back south below the 1.14 handle. USD/JPY rebounded to the high 108 area. Today’s price pattern was mainly a continuation of yesterday’s moves as there were few eco data to guide trading. EUR/USD 1.1309 (2019 low) is first intermediate support as the pair returned in the previous 1.12/1.15 consolidation range.
Sterling trading developed in a remarkably calm way ‘the day after’ the historic defeat of PM May’s Brexit deal. Not that much has changed with respect to reaching a solution for the brexit impasse. A muddling-through scenario might continue for quite some time. Yesterday evening, sterling rallied. Investors concluded that chances on a no-deal Brexit declined and that a delay of the March 29 exit is ever more likely. BoE governor Carney joined this interpretation as he testified before the Parliament’s Treasury Committee. UK December inflation data (headline 2.1%) were largely as expected. Inflation returns to the BoE target due to recent decline in oil prices. The BoE stays in wait-and-see modus. The bank is putting measures in place that can be used in case of financial turbulence due to Brexit. This evening, the spotlights will be on the no-confidence vote against UK government. PM May is expected to survive this vote. If so, it won’t change the course of the brexit process. Political visibility remains as low as to was before this week’s ‘key vote’. EUR/GBP hovers in the mid 0.88 area.
News Headlines
In an attempt to minimize the impact of the partial government shutdown, the Trump administration ordered thousands of furloughed employees back to work. They have been summoned to, a.o., inspect planes and issue tax refunds, but will receive no pay for doing so. A move that critics say is flirting with the illegal.
Sweden’s Left Party said it would abstain in a vote on Friday for Stefan Löfven as PM of a government in which it takes no part in. That would give Löfven the numbers needed to be elected and for the political stalemate to be unlocked, four months after the elections.
The Turkish central bank kept interest rates stable at 24% as inflation (20% in December) is still way above the bank’s 5%-target. The move was widely anticipated though some feared recent inflation easing amidst growth fears and looming local elections (end of March) would have prompted the politically pressured bank to lower rates.
