Markets
Global sentiment changed for the worse yesterday as US President Trump resumed a more aggressive trade war rhetoric. He announced new import tariffs on Brazilian and Argentine steel and aluminum. The subsequent risk-off correction initially had only a limited impact on core yields which were supported by better Chinese and EMU data. The hope for additional fiscal stimulus in Germany helped to put a floor for core yields. A poor US ISM finally pushed US yields lower. Today, there were no important data in EMU or the US. However, comments from President Trump on all kinds of (trade-related and other) topics kept investors on the edge, breaking the momentum of the recent risk/equity rally. The US president threatened to slap tariffs on $ 2.4 bln of French goods as the country had imposed a tax on (mostly US-based) tech companies. The French and the US president also engaged in an open rift on the mission of NATO. Later today, Trump indicated that he was in no hurry to strike a first phase trade deal with China. He even embraced the idea of delaying a deal until after the US presidential election next year. Receding hope on a material step forward in reducing trade tension anytime soon triggered a new selling wave on the equity markets with French, US and UK indices underperforming. This morning, European and, to a lesser extent also US yields, maintained most of yesterday’s rise. The bund future contract even touched a minor ST correction low. However, the avalanche of political comments potentially reviving trade tensions finally caused core bonds to take up their safe haven role. US yields currently decline 5.0 – 6.25 bp, with the belly of the curve slightly outperforming. The German yield curve bull flattens with yields declining between 1.4 bp (2-y) and 4.8 bp (30-y). Intra-EMU spreads versus Germany show a mixed picture today with Portugal again outperforming (-4 bp). Greece (+ 8bp) and Italy (+2 bp) are underperforming.
Yesterday, trading in the major USD cross rates showed quite some interesting moves, with the dollar outright underperforming despite a risk off context. Today, the US currency developed again a more ‘standard’ trading pattern. Further profit taking on equity markets strengthened the yen with USD/JPY currently trading at around 108.70. Interestingly, EUR/USD maintained yesterday’s gain hovering in a very tight range in the upper half of the 1.10 big figure. In this respect, today’s price action suggests some underlying USD softness/euro resilience. However, a real test of the 1.11 resistance didn’t occur yet. Sterling also rebounded after yesterday’s (albeit modest) correction. New polls still indicating a comfortable lead of the Conservative party might have played a role. There was also market talk of investors reducing edges against a decline of sterling after the election. EUR/GBP is again trading in the 0.8525 area. Cable is testing the 1.30 barrier.
News Headlines
Turkish inflation came in at 10.56% (Y/Y) in November, up from 8.55% in October due to base effects linked to the currency moves last year. Still , the CPI rose less than the expected 11%. Finance Minister Berat Albayrak said the lira’s recent stability and a decrease in imports helped “maintain the positive outlook on inflation” and evidenced Turkey could end 2019 below its 12% inflation target.
Ongoing Brexit uncertainty continues to drag on the British economy. Moody’s has cut its outlook on the UK banking system from stable to negative. The credit rating agency cites the persisting Brexit uncertainty has undermined “the country’s growth prospects” at a time when consistently low interest rates are slamming lenders’ profitability.
