Markets
Global core bonds lost ground today as risk sentiment turned positive again. The WSJ posted that US Secretary of Treasury Steven Mnuchin is striving to ease tariffs on Chinese imports, in a way to expedite the US-Sino trade talks. The US Treasury denied the comments right away, but the ‘damage’ was already done. The economic calendar was thin, with only the Manufacturing Production for December (1.1%%) beating market expectations (0.3%). The University of Michigan Sentiment gauge for January is printed later today. The uptick in risk sentiment supported equities and other more risk-oriented assets and weighed on safe havens. Both US Treasuries and German Bunds moved lower after the European bell. After lunchtime, both paired those losses partially. The German yield curve edged higher with changes in the range of +0.4 bps (2-yr) to +1.4 bps (30-yr). US equities opened substantially higher as well. At the time of writing, the US yield curve moves higher with changes varying between +0.4 bps (30-yr) to 2.1 bps (2-yr). Peripheral spreads over the German 10-yr yield are tightening today, with Greece (-4 bps) and Portugal (-5 bps) outperforming.
Swings in the dollar were again modest today, given the price moves in equities and, to a lesser extent, in interest rate markets. Equities extended their recent rebound, mainly driven by positive comments/rumours on the US-China trade talks. The risk rally also caused a moderate rise in core yields. USD/JPY has risen back to the 109.50 area. US/German interest rate differentials widened slightly further in favour of the dollar. However, EUR/USD showed again no clear trend. A positive risk sentiment and hope on easing trade tensions are also euro supportive. EUR/USD traded temporarily north of 1.14, but the dollar captured a better bid this afternoon as US production data printed strong. EUR/USD is again trading marginally below 1.14, little changed in an daily perspective.
Sterling fell prey to profit. Earlier this week, sterling rallied as investors saw a rising chance of the UK avoiding a disorderly no-deal Brexit. This trade lost momentum today. Investors await more concrete steps.UK PM May is reported to hold talks with UK politicians and with top EU policy makers as she tries to broker a new Brexit agreement to be proposed to the UK Parliament early next week. EUR/GBP regained the 0.88 mark (currently about 0.8815). Cable drifted back south in the 1.29 big figure as a test of the 1.30 barrier was rejected yesterday evening. UK December retail sales were also quite a bit weaker than expected. Consumers apparently turned more cautious as uncertainty on Brexit lingers, but statistical issues were also in play (cf. headline infra). However, the report was only of second tier importance for sterling. Most of the intraday setback of sterling already occurred before the release.
News Headlines
Social Democrat leader Lofven will lead the next Swedish government. The Green party forms a coalition with Social Democrats. The Center Party and the Liberals, ex-members of the centre-right Alliance, will provide necessary support from the opposition banks. The new government remains a fragile one which lives by the grace of the Left party who vowed to block proposals which are too right-leaning.
US industrial production rose more than forecast in December (0.3% M/M) driven by manufacturing production (1.1% M/M). The headline figure was depressed by utility output as relatively warm weather reduced demand for heating. The capacity utilization rate unexpectedly increased to 78.7%, the highest since January 2015.
UK retail sales, excluding auto fuel, fell more than forecast in December (-1.3% M/M) as retailers faced post-Black Friday setback. Christmas purchases are increasingly brought forward over the past years to take advantage of heavy discounts. Statisticians have struggled to adjust for this effect. It was the weakest outcome since May 2017.
