Markets
Trading on global markets was mostly order driven and technical in nature as there was no dominant story and investors awaited some key upcoming events. Solid China production and retail sales data initially were no good enough reason to revive the global reflation trade. In the US, the Empire State manufacturing survey showed a loss of momentum (4.9 from 6.3), but underlying sub-indices were not too bad. Even so, signs of a slowdown in activity are still put in balance with perceived chances of further support both from Congress or from the Fed. Regarding the chances for a fiscal deal, investors currently only can be happy with a continuation of the talks, but for now that apparently suffices. On the positive side of the corona story, US regulators indicated that the Moderna vaccine was safe and effective, opening to door for authorization of a second vaccine to be rolled out soon. After four days of modest losses, US equities again turned north with the major indices gaining between 0.5% and 1.0%. European equities mostly slightly underperform the US. The US curve steepens slightly with the 30-y rising about 2 bp. The 10y yield recently hovered near 0.90% as markets await tomorrow’s Fed meeting. Will the Fed be soft enough or even tweak its asset purchases to prevent a further rise in yields at longer maturities? If not, steepening might resume. LT German yields changed less than 1 bp. With the German 10-y yield at -0.625%, key support (-0.65/-0.67% zone) is still within reach. The rise in corona infections and subsequent lockdowns in the likes of Germany, the Netherlands and London prevents European yields to start a genuine post-ECB bottoming out process. 10-y peripheral spreads continue grinding tighter with absolute yield levels in Spain (-0.02%) and Portugal (-0.06%) drifting further into negative territory. The Italian 10-y yield (0.515%) is also setting new all-time lows.
No change in the script for the dollar or sterling today. The TW dollar index (92.65) still struggles not to set a new 2020 low. The new lockdowns in Europa don’t deter EUR/USD longs to stay put. Some market comments even see ongoing low EMU inflation as supporting the single currency. Evidently, the argument is valid in a long-term term perspective. However, if used in a daily narrative, it also tells something on market sentiment. EUR/USD is changing hands in the 1.2150 area, with the correction top at 1.2178 still within reach. Will tomorrow’s Fed communication pull the trigger for a new upleg? USD/JPY also stays on a gradual, but protracted downtrend with the pair again losing the 104 handle (103.80). Sterling showed no clear directional trend today. EUR/GBP reversed limited initial gains and dropped back below 0.91, but is holding north of yesterday’s intraday low. There were few comments/rumours from the Brexit negotiations. Should this be seen as a good omen?
News Headlines
The International Energy Agency downgraded 2021 oil demand forecasts by 170k barrels/day to 96.9m b/d mainly due to another downgrade for jet fuel/kerosene demand. The IEA pointed to downside risks after the upcoming holiday season if a third wave would affect parts of the world before the mass vaccination really kicks off. Global oil supply rose 1.5m b/d in November to 92.7m b/d as the US recovered from hurricane shut-ins and Libya built up production. In December, production may rise again ahead of OPEC+ increasing its quota by 0.5m b/d in January. Brent crude prices aren’t impacted, instead rising back above the psychologic $50/b mark.
The Hungarian central bank left its base rate (0.6%) and overnight deposit rate (-0.05%) unchanged. The increase in risk aversion vis-à -vis emerging markets continues to pose the greatest risk in terms of the inflation outlook. It is the MNB’s clear intention to prevent the current uncertain global market environment from causing an increase in upside inflation risks. The MNB will therefore maintain the difference between the base rate and the one week deposit rate (-0.75%) as long as warranted by the inflationary risk. The forint gradually ceded ground throughout the day with EUR/HUF returning above 355.
