Markets
This morning in Europe, trading still mainly followed the same themes that dominated activity the previous days. The reflation story/hope kept European equities well supported, even as the pace of the rally slowed a bit. German production and foreign trade data for November were reasonably OK and suggest that the negative impact of the new corona wave on growth in Q4 shouldn’t be too big. The Dax equity index today even touched a new all-time high. EMU unemployment (8.3%) but also in the likes of Italy (8.9%) also printed better than expected. Those data traditionally are no market movers, but they might give some confidence as investors ponder the potential impact of the new lockdowns in most of Europe. Key questions for trading today was whether the US payrolls would bring any ‘amendment’ to the established reflationary dynamics/story. The payrolls report showed a mixed-to slightly disappointing picture. US employment declined 140k in December while a modest rise (50k) was expected. However the November figure showed a strong upward revision (336k vs 245k initially). Employment in leisure and hospitality declined sharply (-498k). Other services providing sectors (retail trade, transportation, professional business services) maintained positive job growth. The goods producing sector (+93k) remains a stronghold, too. The unemployment rate was unchanged at 6.7% as was the participation rate (61.5%). Average hourly earnings jumped sharply (0.8% M/M) but the series showed already several ‘strange swings’ in the corona era. Markets didn’t know what card to play after the publication of the report and showed some directionless swings. Will the decline in payrolls put additional pressure on the Biden administration to deliver on additional stimulus or should markets give some more weight on the short-term negative impact of corona? For now, the outcome remains inconclusive. US equities still opened with gains of about 0.5% (S&P). US 5-10 & 30-y yields are rising about 1/2 bp. The weekly gains for the 10-y (+17 bp) and the 30-y (+20 bp) remain quite impressive. German yields today declined less than one bp. Peripheral EMU bonds continue to perform well with spreads narrowing up to 4 bp for the likes of Portugal and Italy.
Over the previous two days the dollar slightly decoupled from the global reflation narrative. Apparently the rise in long term nominal US yields and a tentative bottoming process in the US real yield provided some support for the US currency. This cautious dollar rebound initially continued this morning. EUR/USD temporarily dropped to the 1.2220 area. However, the move stalled soon and the dollar lost modest further ground after the disappointing US payrolls release. EUR/USD currency trades at around 1.2275. USD/JPY briefly tried to regain the 104 barrier, but currently again trades in the 103.70 area. For now, this weeks price action still isn’t anything more than a pause/limited correction on a long-established downtrend. In technical, order driven trading sterling today gained modest ground against the euro and the dollar. Cable trades in the 1.36 area. EUR/GBP dropped to the low 0.90 area. However, for now we still don’t see any clear sign of a sustained sterling comeback, especially not against the euro. Technically relevant levels in this cross rate (0.8933 & especially 0.8865) still are intact for now.
News Headlines
Swedish parliament approved a bill today that gives the government temporary powers to shut shopping centers and public transport as well as fine people that don’t abide to social distancing rules as it seeks to contain the spread of the virus. Up until today, most measures were on a voluntarily basis because of the lack of legal powers to act.
Canadian employment declined a more-than-expected 62 600 in December, more than erasing all of the November gains as restrictions imposed end of last year hit job creation in its full extent. Full time employment still rose a 36 500 but part time employment decreased (-99 000). The unemployment rate rose slightly to 8.6% even as the participation rate declined to 64.9% (from 65.1%). The Canadian dollar trades a tad higher to the US greenback (around 1.268) in the wake of (even more) disappointing US payrolls.
