Markets
The US’ overnight air strike in Iraq unsurprisingly became today’s main trading theme. The move that killed an important Iranian general triggered furious comments from the country’s Supreme Leader, who threatened with “severe retaliation”. Fears of an escalation that could eventually end up in an armed conflict mount. European stocks slid following a mostly red-colored Asian scoreboard before bottoming around noon. Sentiment then turned slightly for the better after US Secretary of State Pompeo said the US is committed to a de-escalation. Oil prices surged almost 4%. A barrel of Brent oil easily capped the $68 barrier. The safe haven flight to high quality paper outweighs the upward pressure on yields that increased oil prices usually generate though. Higher than expected inflation figures in Germany and France (see headline below) were all but ignored. The German yield curve bull flattens as yields tumble -1.7 bps (2-yr) to -6.4 bps (30-yr). Peripheral spreads remain largely unchanged with the exception of Greece (+4 bps). US yield declines vary from -2.8 bps (2-yr) to -5 bps (10-yr). On FX markets, the Japanese yen is the star performer. USD/JPY intensively tested the 108 handle but investors see no reason for a break lower at this stage. The pair is filling bids at around 108.2 currently. EUR/USD extended yesterday’s losses and was headed for 1.1125 area before the downleg ran out of steam. Losses eventually stayed rather contained: EUR/USD is trading at 1.115, down from 1.117. Markets might find more inspiration for trading with the US manufacturing ISM and Fed minutes later today.
Sterling usually doesn’t profit from a risk-off mode and that wasn’t the case either today. Truth be told: losses could have been more outspoken. After a little jump higher during early trading hours, EUR/GBP settled around 0.851/2 for a choppy trading session. Poor UK data clearly wasn’t supportive to the pound either. Sterling investors are looking for guidance. Johnson’s Brexitbill is to be discussed next week in Parliament and should find no difficulties to be approved by the House of Lords on Thursday. After the bill becomes law, the UK is due to leave the EU on January 31. Difficult trade talks about the future trade relationship will then start pretty soon but that’s still a too distant future for investors right now.
News Headlines
Both French and German inflation printed higher than expected in December. German HICP inflation rose 0.6% M/M to be up 1.5% Y/Y (from 1.2% in November). The market expected 1.4% Y/Y. French December consumer prices rose 0.5% M/M and 1.6% Y/Y. Only a rise to 1.4% was expected. Both inflation figures are still below the ECB- target, aiming inflation close to but below 2%. A further sustained rise in oil prices might cause a further rise, at least in EMU headline inflation.
UK eco data published today, showed that uncertainty on Brexit continued to weigh on several sectors of the economy at the end of last year. Consumer credit growth slowed to 5.7% Y/Y in November, the smallest increase since mid-2014. Activity in the UK construction sector also contracted further in December. The UK construction PMI drifted further below the 50 boom-or-bust market, declining from 45.3 to 44.4.
Turkey’s inflation rose slightly more than expected to 11.84% Y/Y in December. The figure was slightly higher than expected. Higher than expected inflation data might limit the room for the Turkish central bank to ease policy further to support the economy. The Turkish lira traded rather stable against the euro today (6.66 area).
