Markets
Several countries outside China stepped up measures today to slow the spreading of the corona virus. However, investors concluded that enough bad news might be discounted for now. Global equities started a broad-based rebound after a hesitant start in Asia. European indices mostly show gains of about 1.5%. The risk-on repositioning also triggered a meaningful rebound in core US and European yields. This reversal was supported by the technical set-up. Both US (1.50 %) and European/German (-0.45% area) yields had reached intermediate support levels, inspiring some investors to take profit on the recent bond rally. Yesterday’s solid US manufacturing ISM maybe also supported the view that global activity might be rather resilient anyway. White House economic adviser Kudlow admits the virus might have some impact on US supply chains but expects the impact to be ‘minimal’. US yields are rising 5-6 bps across the yield curve. German bunds slightly outperform. The German yield curve bear steepens with yields rising between 2.0 bps (2-yr) and 5 bps (30-year). Most 10-y intra-EMU spreads versus German narrow marginally. Markets are now looking forward to US President Trump’s State of the Union address after market close. The dollar is again the main beneficiary among major FX rates from the rise in US/core bond yields. EUR/USD is drifting back lower in the 1.10 big figure (currently 1.1045 area). USD/JPY regained the 109 level. Small less liquid currencies (NOK, SEK, AUD, HUF, PLN,…) also started a (often forceful) comeback after recent losses.
Investors took profit on sterling positions yesterday as speeches of UK PM Boris Johnson and EU Chief negotiator Barnier illustrated both parties have quite a divergent view on what the new EU-UK trade relationship will have to look like. The negotiations will continue to cause harsh headlines. Sterling (more than) reversed the post-BoE gain. EUR/GBP returned north of the 0.85 level and this morning it looked that this correction still had some way to go. However, a second tier UK eco release already helped to change fortunes for sterling. The UK construction PMI beat market expectations and rebounded from 44.2 to 48.4 (47.1 was expected). The construction PMI is not the most important UK data series. The subsequent sterling rebound might be an indication that sterling can stay relatively strong if (domestic) activity in the UK rebounds. This economic rebound might gain momentum even despite ongoing noise from the UK-EU trade negotiations. EUR/GBP trades currently again below the 0.85 pivot (0.8475 area). A global positive risk sentiment was a minor sterling supportive, too. Cable remains locked in tight sideways range (1.3040 area) as the dollar was in better shape overall.
News Headlines
The EU rejected parts of the new US peace plan for the Middle East. The bloc’s Commissioner for foreign policy Borrell said that letting Israel keep settlements in the occupied would break with internationally agreed parameters “could not pass unchallenged”.
The Trump administration has finalized a new rule, first proposed in May of last year, that allows it to impose tariffs on goods from countries accused of having undervalued currencies even they aren’t officially designated as “currency manipulators” by the US Treasury. Treasury has just recently removed China from that list.
An internal analysis from the OPEC+ technical committee estimated Q1 demand growth for oil would fall to 0.8m barrels/day and 0.77m b/d in Q2 should their worst-case scenario for the coronavirus materialize. It would create a 1.6m b/d oil glut if current production cuts are maintained. Oil demand would rebound to 1.2-1.3m b/d in the second half of this year though.
