Markets
Europe took a cautiously optimistic start to the week. Sentiment was boosted by comments from EU chief negotiator Barnier who said that a Brexit trade deal could be reached this week if a compromise on fisheries is found. European stocks eked out modest gains ranging from 0.5% to 1%. Optimism on WS dwindled throughout the session to close mixed. Investors weigh ever more restrictions (e.g. in NY) against the start of vaccinations as the coronavirus spread shows little signs of easing. NY mayor De Blasio said the city should be prepared for a full lockdown. The huge SolarWinds cyber security breach added to overall caution. Regarding fiscal stimulus talks, the group of bipartisan lawmakers stripped out two contentious elements (state and local government aid and liability protection for companies), shrinking the bill from $908bn to $748bn to raise its approval odds. US Treasuries pared losses in lockstep with US stock indices retreating from intraday highs, erasing a more than 5 bps rise at the long end to close unchanged. The Bund underperformed, seeing the yield curve bear steepening with yields up 1.2 bps (2-yr) to 2.7 bps (30-yr). The pound performed well on Barnier’s comments though an attempt to extend opening gains met resistance at EUR/GBP 0.905. The pair closed eventually north of 0.91 (down from 0.916). The dollar traded heavy once again. DXY (close at 90.71) set a new 2020 low at 90.42, but the fading optimism as well as a technical rebound saved matters for the dollar at the eleventh hour. EUR/USD came just shy of its 2020 high before retreating. The duo still finished the day higher at 1.2144 (from 1.2112).
Asian markets trade mostly in the red following a lackluster WS performance. China is one of the exceptions after data showed its economic recovery remains on track (see below) and following a liquidity injection by the PBOC. The dollar, euro and sterling hold steady against yesterday’s close. The Aussie underperforms G10 peers as tensions with China rise (cf. infra). Core bonds tread water.
Today’s economic calendar only contains the US Empire Manufacturing index. Risks are tilted to the downside following the spread of the virus and a string of measures to contain it. Its market impact will probably remain limited. Overall sentiment will be the key driver. A rather cautious bias is expected to prevail going into the Fed meeting and European PMIs tomorrow. We’re keen to see whether the US S&P500 manages to hold the narrow upward trend channel. Core bonds have their downside protected. The dollar stays vulnerable to the downside but it might be too soon for a break lower today. UK’s labour market report today will be ignored by sterling, having its sights set on the Brexit negotiations. As evidenced by yesterday’s price action on Barnier’s comments, an actual breakthrough will support the currency initially. We remain skeptical whether gains should hold longer term.
News Headlines
Chinese media reported that China’s planner has allowed Chinese power plants to import coal without restrictions, except for coal from Australia. Australia’s Trade Minister Birmingham labeled the Chinese actions as discriminatory trade practices and said that ‘the risk profile of trading with China has grown significantly during the course of this year’. The headlines are putting pressure of stocks of Australia mining companies. The Aussie dollar is losing modest ground but AUD/USD stays north of 0.75.
The November data on production and retail sales showed that the economic recovery in China remains on track. Industrial production rose to 7.0% Y/Y, the highest level since March 2019 and raising YTD production growth to 2.3% from 1.8%. The data were in line with expectations. The rise in production was supported by good export demand, but domestic demand also stayed on a recovery path as retail sales improved from 4.3% Y/Y to 5.0% Y/Y. Fixed assets investments (2.6% Y/Y) and property investment (6.8 Y/Y) showed a similar picture. The data didn’t help the yuan this morning. USD/CNY is rising slightly to 6.555.
