Markets
With Brexit negotiations and talks on a US fiscal package still pending, two important issues still have to be resolved before markets will be allowed to shift into end-of-year modus. Investors remain confident about a constructive outcome. US equities are holding near record levels. Most European indices are still some way off these records, but maintain recent gains quite easily. The ongoing rally in cyclical commodities like copper also suggests markets continue to position for the global economy to join the recovery as it already developed in the likes of China. Today’s eco data at least didn’t question this positive bias. UK retail sales declined less than expected in November and where still higher compared to the same period last year (-2.6% M/M and 5.6% Y/Y for sales ex auto fuel). In line with PMIs German December IFO business confidence also printed stronger than expected. Except for part of the services sector, German companies can cope reasonably well with the impact of the new corona measures. At the same time they are preparing for a better next year. Both current conditions (91.3 from 90.0) and expectations (92.8 from 91.8) improved.
Core US and EMU bond yields initially tried to extend this week’s gradual uptrend, but the news flow was too light for this trend to gain further traction now. The US yield curve shows a minor (corrective?) flattening with yields declining up to 1.2 bp (30-y). German yields show a similar picture after the underperformance triggered by the strong PMIs earlier this week. German 10-yield still tries to leave the -0.60% ‘danger zone’ behind (currently -0.58%). Intra-EMU spreads versus Germany are also heading for a pause after a gradual but protracted narrowing. Spanish, Portuguese and Italian 10-y spreads versus Germany widen 1/2 bp. Greece underperforms (-7 bp). This week’s broader uptick in yields also aborted Portuguese and Spanish 10-y yields’ journey into negative territory. After a temporary pause last week, the dollar again faced headwinds this week, touching lowest levels since the spring of 2018 for the trade-weighted index (DXY sub-90) and several other USD cross rates. The Fed didn’t come to rescue for the US currency. A pinch of euro strength (PMIs) further propelled EUR/USD north of the next 1.22- big figure. The pair today held a tight consolidation pattern in the 1.2250 area, keeping the overnight top within reach. EUR/GBP (0.9060) rebounded back north of the 0.90 barrier as headlines from both sides of the Brexit negotiations showed they still struggle to find comment ground on the highly symbolical topic of fisheries. BoE’s Vlieghe reopening the debate on additional interest rate cuts into negative territory also didn’t help sterling.
News Headlines
The Russian central bank kept policy rates stable at 4.25%. In its statement the door for easing remains open though stubbornly high inflationary pressures may limit the bank’s ability in doing so. November inflation came in at 4.4% y/y, above the central bank’s 4% target and is to an important extent driven by the ruble’s slump in 2020. The Russian central bank will keep policy accommodative for all of next year though. EUR/RUB strengthens beyond 90.
Some of the Fed’s emergency programmes that end by the end of the year have drawn some last-minute demand. Its Main Street lending facility saw a demand increase of 37% compared to last week, with the Fed lending out an additional $2.7bn to bring the total amount to roughly $10bn. Its Municipal Liquidity Facility for state and local authorities also saw interest increase, with the total facility usage now at $6.4bn. Both are still far below the upper limit of $600bn and $500bn respectively.
