Markets
The Capitol Hill riot caused quite some upheaval in media, but didn’t worry markets. Joe Biden’s presidential ceremony is rounded with a small delay, with US President Trump promising a peaceful power transition. Today’s European trading session was probably the most numbed since the start of the fresh year. We’ve seen some marginal corrections on the running reflationary trends: the dollar is off its worst levels, core bonds gained marginally ground and Brent crude plateaued just below $55/b. European stock markets mostly record small gains. We must add that markets are making U-turns as the US session gets going, especially on the US Treasury market (fresh bear steepening). US stock markets are also off for a good start.
Today’s EMU eco calendar contained December EC confidence data and December inflation numbers. Economic confidence rose more than expected, from 87.7 to 90.4, mainly on the back of a better industrial confidence. We’ve witnessed a similar split in PMI’s where the domestically-oriented services sector (hit by lockdowns) lags behind the export-driven manufacturing sector. Headline inflation remained stuck at -0.3% Y/Y as expected with core inflation also fixed at the EMU lifetime low of 0.2% Y/Y. From next month onwards, things could finally turn for the better as Germany’s temporary VAT cut ends and with the downward effect from energy prices set to unwind during Q1. Such return to positive inflation levels would suit amongst other Bundesbank President Weidmann who reiterated today his concern that the ECB “must be careful that the emergency monetary policy measures do no become permanent. They must be scaled back after the crisis”. As of the end of last year, the ECB bought slightly over €750bn under its Pandemic Emergency Purchase Programme, with the maximum amount of the portfolio standing at €1.85tn and the programme running at least until March 2022. Weidmann earlier stated the obvious by fearing that the ECB would become (already is ?!) the dominant market influence which levels out differences in risk premiums. The US eco calendar contained weekly jobless claims, which stabilized below 800k and the December non-manufacturing ISM. The latter surged from 55.9 to 57.2 while consensus expected a setback to 54.5. Details showed increases in business activity (59.4 from 58) and new (export) orders (58.5 and 57.3 respectively) while the employment component showed its first sub-50 reading since August. Both supplier deliveries and prices paid remain elevated and above 60.
News Headlines
China’s foreign exchange reserves rose to the highest in more than 4.5 years in December, data from the PBOC showed today. The stronger-than-expected increase comes amid a declining US dollar and the rise in global asset prices, the PBOC explained in a statement. Foreign flows into Chinese stocks, bonds and its currency have been strong as the country leads the global economic recovery from the pandemic.
UK companies saw the decline in sales and jobs because of the pandemic worsen in December, a survey by the Bank of England showed. Businesses said sales were cut 16.1% on average during the fourth quarter, compared to a 15.3% hit in the November edition. Hospitality businesses were hit especially hard while food and accommodation businesses expected the impact to jobs and sales from the pandemic would persist into 2022.
In its semi-annual review of financial risks, the Bank of France said debts of non-financial companies are currently the greatest vulnerability in the economic system. Because of the second lockdown, although economically less severe, the subsequent recovery will inevitably be slow(er). That could cause a significant increase in defaults of non-financial firms which could then weigh on bank’s results and curtail credit supply.
