Markets
Markets followed the same line from yesterday. Risky assets rallied as investor apparently feel comfortable that the potential negative impact of the coronavirus will be counterbalanced by a supportive monetary policy. Despite plenty of headlines on poor EMU growth, on tough EU-UK Brexit negotiations and on political uncertainty, the EuroStoxx 600 touched an all time record and the German DAX came within reach off such a record level. The S&P 500 and the Nasdaq also opened at historic top levels. In the US, NFIB small business confidence confirmed recent positive news flow on the economy as the index improved more than expected. In his prepared remarks for the semi-annual testimony Fed Chair Powell said that the Fed is closely monitoring the impact of the coronavirus on the economy. Even so, the Fed Chair repeated that policy is appropriate and that this will continue to be the case as long as the data support the Fed current’s outlook. The Fed intends to gradually move away from the use of repo transactions to ease tensions on the money markets. It also intends to slow asset purchases (T-bills) but will allow the balance sheet to growth in line with trend demand for Fed liabilities. So, some ongoing balance expansion might be on the cards. This might give (bond) markets some further comfort. US yields are rising 1-1.5 bp across the curve, with the 30-y slightly outperforming. The German yield curve slightly bear steepens with the 30-y underperforming (+2.5 bp). Italy attracted record buying interest for a 16-y benchmark sale, with books reported above €50 bln. The Italian Treasury finally sold €9 bln of the bond at BTPS+5 bp. On the intra-EMU bond markets, 10-y yield spreads changes versus Germany are limited. Ireland slightly underperforms (+3 bp).
On the currency market, EUR/USD initially hovered in a tight range close to, mostly slightly north of 1.09. A test of the 1.09 pivot occurred at the start of US dealings, but the 1.0879 2019 low ‘survived’. USD/JPY is also captured in a tight range and fails to profit from the record race on US equity markets. The pair currently trades in the 109.80 area.
As expected, the UK Q4 growth data painted a rather grim picture of the UK economy at the end of last year. UK activity didn’t grow in the last quarter of 2019 (0.0% Q/Q). Growth compared to the same period a year earlier was stronger than expected due to upward revisions of growth in the previous quarter. From a market point, the most important element was that the report didn’t provide any big negative surprise. The starting point was indeed as the BoE expected. This suggests that BOE should be in no hurry to amend their call to leave policy rates unchanged for now. They have time to await the hoped for better data going forward in 2020. EUR/GBP hovered up and down in the mid 0.84 area after the release. The UK currency still ignored headlines on a standoff between the UK and the EU on the access of the UK financial services sector to the EU market, with potentially negative impact for the London financial services industry. Ongoing euro weakness finally tilted the EUR/GBP balance south. The pair currently trades in the 0.8425 area. Cable is resisting the broader USD strength quite well. The pair is trading in the 1.2930 area.
News Headlines
EU officials said that a scenario where the outbreak of the coronavirus would trim Chinese economic growth by 1% would not materially impact the European economy. They added that “at this stage” an economic slowdown is confined to China and other Asian countries and could lead to a downward revision in global growth of about 0.2%.
A document from UK Treasury which outlines the island’s opening positions for trade negotiations revealed calls for “permanent equivalence”. That would grant UK’s financial sector access to the EU’s single market without the bloc having the right to revoke the license to operate. EU Brexit negotiator Barnier was quick to rebuff the demand.
