Markets
After a brisk revival at the start of this month, the risk on/reflation trade took a pause today. Still, it would be an exaggeration to label it a correction. Several regional equity indices are still at/very close to all-time/cycle tops. European equities are losing less than 0.5%. US indices even open with marginal gains. Eco data in Asia this morning (China Caixin Services PMI) confirmed that the post-pandemic rebound remains firmly on track. European and US investors took a more cautious stance. Maybe the ongoing high level of infections in Europe and the US and a continuation of restrictive measures (stay at home in LA) provided a good enough reason for some investor caution after recent euphory. The EMU Final composite PMI printed well in contraction territory (45.3) but the ‘downdrift’ was slightly less than initially expected. In the US, jobless claims after unexpectedly rising in the previous two weeks, this time printed better than expected declining 75 000 to print at 712 000 in the week ended 28 November. The market reaction was modest, maybe partially as Government Accountability Office earlier this week warned on statistical issues with the data series. Core bonds this morning tried to regain some of the ground they lost earlier this week (especially Tuesday) a move that sometimes was driven by little ‘hard news’. However, even in this market reflationary spirits remain present in the background, probably still supported by the hope for additional US fiscal stimulus. US yields partially reversed a small early setback and decline less than 1.5 bp across the curve. European Bonds outperform with yields declining between 1.5 bp (2-y) and 3.0 bp (5/10/30-y tenors). 10-y intra-EMU spreads versus Germany also switched a holding pattern, printing little changed except for a marginal outperformance of Greece (-2 bp).
As was early the case several times of late, even the pause in the reflation trade didn’t came to rescue for the dollar. Especially at the start of the US trading session, the US currency met renewed selling pressure. The trade-weighted dollar now clearly dropped below the 91 mark (90.72). EUR/USD (1.2150) also extends ‘trend-gains’ and leaves the 1.2103 resistance behind. The risk rally taking a breather this time also caused USD/JPY to join the broader USD decline. USD/JPY dropped to the 104 area. This USD/JPY decline also prevents EUR/JPY (126.50 area) to revisit the 2020 top just north of 127. Broad-based USD losses are also illustrated by USD/CHF touching lowest levels since early 2015. Sterling yesterday declined rather sharply an growing unease with ongoing low visibility on the outcome of the Brexit negotiations. With little concrete news on the process still available today, sterling in technical trade regained a small part off yesterday’s setback EUR/GBP currently trades near the 0.9030 level. Cable (1.3465) is nearing the 2020 top, but once again this USD weakness rather than anything else.
News Headlines
Turkish inflation accelerated from 11.89% to a more-than-expected 14.03% y/y in November. Core measures also increased from 11.48% to 13.26% (vs. 12.30% expected). The price increases suggest the recent rate hike by the Turkish central bank to offset the slump in the lira has yet to filter through into the real economy. EUR/TRY briefly spiked after the release but normalized quickly to trade at 9.49 currently..
Italy’s national institute of statistics (ISTAT) expects GDP to decline 8.9% amid faltering domestic and foreign demand this year before climbing 4% in 2021. ISTAT pointed at the new containment measures in many countries to have put a drag on international recovery perspectives. Unemployment is seen at 9.4% in 2020 and will probably rise to 11% in 2021.
