Markets
Global core bonds edged higher today with US Treasuries outperforming German Bunds. German Bunds opened with an upward tendency as the German Ifo Business Climate index printed slightly below expectations. Other than that, the eco calendar remained empty. ECB’s Nowotny signaled that the bank has not made any conclusions yet on a new TLTRO and expects no decision at the March meeting. ECB president Draghi speaking later today is a wildcard. The Germany yield curve edges lower with changes in the range of -0.9 bps (2-yr) to -2.4 bps (10-yr). US Treasuries moved sideways throughout the day with investors preparing for US President Trump’s meeting with China’s Vice-President Liu He and tonight’s panel discussion with several Fed heavyweights. Talk of the day will be the balance-sheet run off that is now expected to come to a halt at the end of this year. US Treasuries moved higher ahead of the US opening bell on technical buying. The US yield curve is bull flattening with changes up to -3.1 bps (30-yr). Italian BTP’s edged lower in the run-up to Fitch’s rating review later today. Financial markets are pricing in a 30% probability of a downgrade, which could dampen investor sentiment. Peripheral spreads over the German 10-yr yield are stable with only Italy (+5 bps) and Greece (+4 bps) underperforming.
In line with the price action earlier this week, trading in the EUR/USD cross rate was again confined to a very tight range. The pair gained a few tick in the run-up to the publication of the German Ifo business sentiment. The Ifo indicator slightly missed, albeit modest, market expectations. EUR/USD retuned to the 1.1330/40 area. There were no eco data in the US. Even so there was a temporary ‘up-tick’ in volatility at the start of the US session. US yields and USD/JPY declined in lockstep. USD/JPY dropped from the 110.85/90 area and trades currently again in the 110.70 area. The move also caused some temporary jitters in EUR/USD, but the pair currently trades again near 1.1335. Later today, (FX) markets will look out for comments from the Fed monetary policy forum.
At the end of last week and during most of this week, sterling traded with a positive bias. Investors tried to look through day-to-day ‘Brexit-noise’ and assumed that both parties would finally succeed avoiding a no-deal Brexit. Meetings at the highest level were seen as an indication that a compromise was building. Today however, officials from both sides tempered expectations. This change in tone caused some end of week profit taking on sterling longs before partially reversing losses at the start of US dealings. EUR/GBP is again trading close to the 0.87 handle. Cable is changing hands in the 1.30 area. Next week, political turmoil might intensify as UK PM May will again address Parliament and report on the progress in its negotiations to change the Irish backstop arrangement.
News Headlines
Germany’s IFO business confidence in February came in close to but below expectations. The headline figure fell from an upwardly revised 99.3 to 98.5, the weakest since December 2014. German businesses assessed both the current situation (103.4 vs. 104.5 in January) as the 6-month outlook (93.8 vs. 94.3) less favorably. Companies were increasingly pessimistic in the manufacturing, services and construction sector with a spark of optimism in trade.
German Economy minister Altmaier said the EU is ready to strike a deal with the US in which industrial tariffs are cut but added there is still “a long way ahead”. Meanwhile, EU’s trade chief Malmstrom said the EU stands ready to retaliate over any US auto tariffs. The retaliatory list would include the likes of Caterpillar and Xerox.
Oil prices (Brent) reached a new 2019 high on hopes the US and China are close to end their trade dispute which has been weighing on global sentiment and growth. Despite record US production, prices have also been supported by ongoing production cuts by OPEC.
