Markets
Markets started an important trading week on soft footing amid rising Brexit worries. UK tabloid newspaper The Sun reported prime minister Johnson was ready to pull out of trade talks within hours over European demands. It continued to rain pessimistic quotes on the financial wires thereafter. A UK official said that if there is no progress, then Brexit talks would probably end today. A government spokesman ruled out an extension of the transition period to continue trade talks next year. EU diplomats sound equally pessimistic, saying there was no decisive progress in talks, adding that ‘significant’ differences remain. For the EU, Wednesday is the cut-off day for a Brexit deal. It could then be presented at the European Summit a day later. PM Johnson is to due speak with EC president von der Leyen later today to take stock but things do not look well as they currently stand, forcing markets to at least reconsider the possibility of a no-deal Brexit. The pound sterling came under strong selling pressure along the process. EUR/GBP soared a full big figure to 0.912 at the time of writing, the highest level since mid-October. Despite the dollar not being in a great shape, cable also declined from 1.344 to 1.331. That’s off intraday-lows at around 1.322 however. Expected sterling volatility over the course of one month soars to the highest level since March!
Most other financial markets were caught in the Brexit risk-off slipstream. European equities slumped at the opening after a mixed-to-negative Asian session before recouping about half of the losses. Stocks lose a little over 0.5%. WS opens mixed with the Nasdaq in the green but the S&P500 and DJI slightly losing. Core bonds gain with the German Bund slightly underperforming US Treasuries. The US yield curve bull flattens withs yields down 3.1 bps (10-yr) to 4.1 bps (30-yr). German yields shed 1 bp (2-yr) to 3.6 bps (30-yr). Peripheral spreads to Germany’s core advance 2 bps (Italy) to 3 bps (Greece). The dollar initially profited from the dire sentiment but its upward potential turned out to be both capped and limited. EUR/USD briefly dipped below 1.21 but soon returned north again. The currency pair is now trading in the 1.216 area, slightly up from Friday’s close at 1.2121. Similarly, the trade-weighted greenback’s trip north of 91 was short-lived. DXY trades at 90.67 currently. Interestingly, despite the negative sentiment, EUR/JPY remains close to recent highs at 126.3, even slightly up for the day. USD/JPY barely manages to keep the 104 barrier.
News Headlines
California governor Newsom announced one of the harshest lockdown measures in the US after the state recorded a daily 30k high new Covid-cases. Private gatherings of any size will be banned, wearing a face mask required and all but critical infrastructure and retail operations will have to close. The new rules count for at least 3 months.
German foreign minister Maas said that European foreign ministers will discuss measures against Turkey after diplomatic attempts to restore ties bumped into continuous provocations while tensions between Turkey, Cyprus and Greece increased. The Turlish lira lost slightly ground with EUR/TRY returning above 9.50.
German industrial production bounced more than expected in October (3.2% m/m vs 1.6% m/m), but remains down 3% y/y. It’s the sixth consecutive monthly increase, highlighting Germany’s outperformance within Europe as witnessed by eg PMI’s. The October increase was broad-based apart from non-durable consumer goods. Fresh restrictions imposed in November suggest tougher times ahead.
