Markets
Markets just hummed along to the risk-on tune yesterday. Economic data was mixed (disappointing US jobless claims and Philly Fed outlook indicator but a soaring housing market) but left no traces. US stimulus talks continue with some suggesting a deal could be made in the course of the next 48 hours. A new stumbling block arose after a Republican Senator sought to introduce language in the bill that would prevent the Fed from reviving several facilities that are due to expire at the end of the year. But that didn’t stop US yields to stage a sharp intraday U-turn, erasing all losses as the US joined dealings. Yields were up 0.5 bps (2-yr) to 2.4 bps (30-yr). The Bund outperformed, keeping yield changes flat across the curve. Stocks rose 0.5-1%. The trade-weighted dollar (DXY) fell below the 90 big figure (close at 89.82, a 2020 low). USD/JPY tested 103 but avoided a close below. EUR/USD advanced to close near 1.227. Sterling ignored the Bank of England wait-and-see approach, instead eying less optimistic Brexit quotes.EUR/GBP arose from intraday lows sub 90 to finish at 0.903.
Asian-Pacific mood turned sour after Reuters reported the US will blacklist nearly 80 Chinese companies, preventing US companies to trade with them. Most indices trade in the red. The Bank of Japan convened (see below). Core bonds grind higher while the dollar rebounds after several days of weakness. DXY tries to regain the 90 handle but the move lacks conviction. EUR/USD changes hands around 1.225.
Today’s economic calendar eyes rather meagre with Germany’s Ifo the sole headliner. Risks are tilted to the upside following strong PMIs earlier this week and as the current German lockdown is probably not captured yet. After the recent central bank flurry however, focus is skewed towards the classic trading themes again, ie US stimulus talks and Brexit. Both have hit a snag yesterday and might be headed to extra time over the weekend. Along with the Reuters report, we thus assume investor caution to prevail today. A major risk-off positioning is unlikely though. Markets’ base scenario still assumes a deal eventually in both topics. But bare in mind liquidity is drying up as we approach the holidays. Core bonds’ downside is well protected. The dollar decline might decelerate. Sterling hopes for a Brexit deal soon but that might still be some days away. In a daily perspective, market nervousness going into the weekend might keep a lid on the pound. November retail sales were less dramatic than feared but are ignored.
News Headlines
The Bank of Japan as expected left its short term policy rate (-0.1%) and the target rate for the 10-y government bond yield (0%) unchanged. The BoJ expects the economic recovery to be moderate thus extending its special programme to support corporate financing by 6 months. As the economy and prices are projected to remain under downward pressure for a prolonged period, the BoJ will conduct an assessment on further effective and sustainable monetary easing. The outcome of the review will be announced in March.
The central bank of Mexico left its policy rate unchanged at 4.25%. However two members of its 5-member board voted for a cut to 4%. The Bank said that this pause (in the easing cycle) provides the necessary room to confirm that the trajectory of inflation converges to the target. The Mexican central bank targets 3% inflation with a tolerance band of 1%. Mexico’s inflation slowed to 3.33% in November from 4.09% the previous month.
