Markets
Parallel brexit discussions resulted in agreement on implementing the Norther Ireland protocol as part of the withdrawal treaty. UK PM Johnson undermined this protocol by breaking international law and unilaterally handing him his government to rewrite parts of it in case of a no deal brexit by the end of the year. Scrapping these provisions removes fears of interference in the Norther Irish peace process and could improve the atmosphere for the simultaneous trade-related talks on fisheries, the level playing field (including state subventions) and juridical power. Sterling managed to partly undo intraday losses, returning from EUR/GBP 0.9110 to EUR/GBP 0.9060, but sterling can’t built momentum with trade talks still deadlocked ahead of tomorrow’s Johnson-von der Leyen match-up and time running out rapidly.
The UK news couldn’t hide the fact that general trading conditions remained very subdued. European stock markets correct around 0.5% lower. US Treasuries eke out small gains with the US yield curve bull flattening despite tonight’s start of the US Treasury’s mid-month refinancing operation ($56bn 3-yr Notes). Tomorrow’s $38bn 10-yr Note sale and Thursday’s $24bn 30-yr Bond auction will draw more attention. The German yield curve shifts in similar fashion with yields shedding 0.7 bps (2-yr) to 2.2 bps (30-yr). 10-yr yield spread changes vs Germany barely budge with Greece (+3 bps) slightly underperforming. The dollar can’t create upward momentum and stabilizes near sell-off lows. The trade-weighted greenback changes hands near 90.80 (last week’s lost support at 91.75) with EUR/USD in the neighborhood of 1.2125 (last week’s lost resistance at 1.2011). The Japanese yen didn’t respond to PM Suga’s flagged fiscal stimulus bill with USD/JPY listless in the 104-area.
Many European investors remain side-lined given multiple event risk stemming from brexit discussions, the EU Summit (EU Budget & NextGen fiscal deal) and the ECB’s final policy meeting of the year. A deteriorating growth and inflation outlook will press the ECB to ease monetary policy further. The most obvious path is an extension in time and increase in size of the Pandemic Emergency Purchases Programme. Since March, the ECB bought around €700bn from the €1.35tn envelope. Keeping the mid-June 2021 end date unchanged would require a significant increase in monthly PEPP purchases from the +-€60bn/month since June to +-€90bn/month. Announcing a 12-month extension in combination with a €500bn portfolio increase (€1.85tn) would allow the ECB to keep the current pace of purchases for the coming 19 months.
News Headlines
Economic activity in South Africa rebounded a spectacular 66.1% in Q3. This left activity still 6.0% below the level of the same period last year. The country not only suffered a 51.7% setback in activity in the second quarter due to the corona pandemic. The country was already in recession before the corona outbreak, recording four consecutive quarters of negative growth since Q3 last year. Mining (228%) manufacturing (210,2%) and trade (137%) were the main drivers of the recovery. A new corona wave and little fiscal room to support the economy might complicate the recovery. The central bank expects only a 3.5% rebound in 2021 after a contraction of 8.0% this year. Still the rand continues its protracted rebound with USD/ZAR (15.05 area) touching the lowest level since late February.
Hungarian November inflation data painted a mixed picture. Headline inflation declined further from 3.0% to 2.7%. However, the core measure ex indirect taxes as published by the national Bank of Hungary, rose from 3.2% to 3.3%. Together with the valuation of the forint, a sustained decline in inflation is an important factor for the MNB to be able over time to reduce its one week deposit rate of 0.75%. EUR/HUF hovers near the 360 barrier, with the rift between the country and the EU on the rule of law clause the main driver short-term.
