Markets
EU Chief negotiator Barnier offered sterling another glimpse of hope by telling a private meeting of ambassadors that a EU/UK trade deal could be reached this week in case of a compromise on the symbolic issue of fish. EUR/GBP opened sub-0.91 in Asia on EC von der Leyen and UK PM Johnson’s earlier joint statement/commitment to continue talks beyond their self-imposed Sunday deadline and repeated that trick (EUR/GBP 0.9050) on the Barnier comments. From a technical point of view, the pair remains in no one’s land between the psychological 0.90 barrier and the EUR/GBP 0.9292 September high. The UK yield curve bear steepened significantly with UK yields rising by 3.3 bps (2-yr) to 8.3 bps (30-yr). A brexit deal both reduces the probability of the introduction of negative yields by the Bank of England and accelerates the return to pre-pandemic levels compared to the double whammy of Covid-19 & hard brexit.
• The improved trade prospects triggered a stronger opening for European stock markets. They managed to hold those gains, but failed to generate additional momentum. Main European indices gain around 1%. The positive risk sentiment hides that countries like France (Banque de France) and Germany (Economy Ministry) downwardly revised growth forecasts because of extended curbs. The French central bank now puts the blow for this year at 9.3% of GDP (from -8.7%), while next year’s revival will only be to the tune of 4.8% (7.4% expectation in September). The Germany economy ministry mainly warns for the significant setback in the fourth quarter of this year. US stock markets open positively as well, so far ignoring SolarWinds huge cyber security breach. UK Gilts lead the way on the core bond markets, with the German and US yield curves show a similar, though less outspoken bear steepening. Changes on the US yield curve range between +0.5 bps (2-yr) and +3.4 bps (30-yr) with Germany yield currently adding 1.7 bps (2-yr) to 3.6 bps (30-yr). 10-yr yield spreads vs Germany narrow by up to 3 bps.
The dollar remains in dire straits on FX markets, selling off from start to finish. The trade-weighted greenback tested the YTD-low at 90.48 with EUR/USD making the mirror move to the YTD-high at 1.2175. Wednesday FOMC meeting could be at play with investors suddenly becoming nervous about potential additional central bank action to counter exploding US Covid-19 infections and the adverse economic impact from restricting measures. Even USD/JPY is sinking. The pair trades sub-104 at the softest levels since early November.
News Headlines
The governor of the Bank of Israel indicated that the central bank will probably continue intervening in the FX market in 2021 to prevent the currency from strengthening beyond what is mandated by economic fundamentals. The currency currently (USD/ILS 3.255) trades near the strongest level in more than 12 years. The central bank this year has bought about $17bn in foreign currency raising forex levels to a record $ 167bn. At the same time, the governor assessed that the reasons causing the rise of the shekel were mostly good, including a persistent current account surplus and large foreign capital inflows.
In its interim report on monetary policy, the Bank of Greece signaled that additional action beyond the ‘Hercules’ scheme will be needed to address issue of non-performing loans. NPL’s by the end of September stood at €58.7bn, a decline of €9.8bn from end 2019. However, at 35.8% the NPL ratio remains high. The Bank of Greece also indicated that the high percentage of performing loans benefiting from moratoria until end-December 2020 contained the inflow of new NPLs. Regarding the economy, the Bank of Greece’s baseline scenario expects a contraction by 10% in 2020 fallowed by a rebound of 4.2% and 4.8% in 2021 and 2022 respectively.
