Markets
Global core bonds gained ground today with US Treasuries outperforming German Bunds. Risk sentiment initially remained rather upbeat as political events in the US are making progress (border wall legislation and US-Sino trade talks). European equities moved higher at the opening bell, but the tide turned immediately afterwards. Global core bonds took a first step higher as investors cautiously moved into safe havens. Germany narrowly avoided a recession as Q4 GDP printed 0.0% (QoQ) vs. -0.2% in Q3 and below expectations (+0.1%). The Q4 EMU GDP result was confirmed at 0.2% MoM and 1.2% YoY. Global core bonds took a second step higher as US retail sales heavily missed expectations across the field. The December results set multiyear lows. At the time of writing, the German yield curve is flattening with changes in the range of-4.3 bps (30-yr) to +0.2 bps (2-yr). The US yield curve moves lower too with changes up to -6.6 bps (5-yr). Spanish PM Pedro Sanchez was rumoured to announce the date for early Spanish elections, but the announcement has not (yet) been made. Peripheral spreads remained stable with only the Italian spread rebounding (+5 bps) after the tightening of late.
EUR/USD touched a minor correction low early in Asia. From there, the pair hovered up and down in the upper half of the 1.12 big figure. The EMU data (German & EMU GDP) were weak but mainly as expected. EUR/USD revisited the mid 1.1250 area early in European dealings as EMU equities took a hesitant start. However, despite pending event risks (trade, Spain, EMU data…) there was no concrete enough trigger to push EUR/USD to the 1.1216/1.1187 support. Dollar momentum improved again slightly as investors awaited the US data, but USD bulls were wrong-footed. Jobless claims were weakish and retail sales (-1.2% M/M, -1.7% M/M control group) missed the consensus by a huge margin. Euro softness was replaced by USD weakness. EUR/USD rebounded to the 1.13 area. USD/JPY dropped from 111+ levels and is nearing the 110.50 area. Key question is whether this kind of USD softness will be able to save EUR/USD in a sustainable way if no euro supportive news kicks in.
With no important UK data scheduled, sterling traders mainly watched the political rhetoric in the run-up this evening’s Brexit vote in Parliament. UK PM May asks Commons to confirm her mandate no renegotiate the Irish Backstop arrangement. However, division in the Conservative party remains a source of uncertainty on the outcome of the vote. BoE’s Vlieghe indicated that a no-deal Brexit is more likely to require an easing of monetary policy than a tightening, downplaying recent balanced, moderately optimistic BoE talk. GBP selling accelerated during the day. EUR/GBP trades currently in the 0.8830 area. Cable dropped below the 1.28 handle despite broad USD weakness.
News Headlines
December US retail sales were horrible. The headline reading fell by 1.2% M/M, the biggest decline in 9 years. All but 2 of 13 major retail categories showed a drop. The retail sales control group, which excludes food services, car dealers, building-materials stores and gasoline stations and is used as a proxy for consumer demand in GDP, fell by 1.7% M/M. That’s the worst outcome since the Sept 11 terror attacks.
Bank of England chief economist Vlieghe sounded dovish. He thinks that the economy should be treated with a slower pace of rate hikes than previously anticipated even if the UK secures a brexit deal. More specifically, he has in mind 1 hike a year. This downgrade mainly reflects global weakness starting to impact the UK economy.
