Markets
Asian stock markets started the week on a better footing than Europe/WS ended last week (-0.5%). South Korea is one of the outperformers with the government pondering the option of handing cash outs. Brent crude stabilizes above $55/b with media/markets again balancing the prospect of fiscal stimulus against spreading Covid-mutants and slower-than-hoped vaccination roll-outs. The dollar finds itself on a weaker footing with the trade-weighted index slipping to last week’s low in the low 90-area. EUR/USD is moving towards last week’s 1.2190 high. Friday’s (expected) setback in EMU PMI’s didn’t scar the single currency. The traditional negative correlation with the Italian 10y yield spread doesn’t show yet neither The Italian spread added a combined 11 bps on Thursday and Friday. First because of the ECB’s strongest signal as of yet that it could leave some PEPP-resources unspent. Second as Italian PM Conte is still battling to secure a Senate majority ahead of Wednesday or Thursday’s vote on the annual report of his Justice Minister. Defeat would further weaken Conte’s position and raises the probability of early elections in the middle of the Covid-19 crisis. From a dollar point of view, markets eye Wednesday’s FOMC meeting. Powell will strike a soft tone.The greenback could be in the soft spot after most Fed governors put aside the possibility of slowing asset purchases already this year.The Fed currently commits to buying $120bn assets each month until sufficient progress is made towards achieving its maximum employment and price stability goals. Fed members at this stage do seem to agree that the debate on slowing them down could start in H2 2020 in lockstep with an economic revival thanks to mass immunity and Biden’s economic reform agenda. The Fed message could cap the short term potential in US yields as well,taking the upper hand over this week’s disturbing potential from US supply. The US Treasury kicks of its end-of -month refinancing operation with a 2-yr Note auction tonight. From a technical point of view, we look at 1.07% intermediate support for the US 10-y yield. A break lower paves the way for a return to 0.98%. Apart from US supply, today’s eco calendar contains German Ifo business sentiment and several central bank speeches (ECB) at the virtual World Economic Forum (annual Davos meeting). Both won’t surprise given last week’s central bank meeting and PMI releases. US President Biden’s speech on manufacturing is a wildcard in case he manages to boost reflationary spirits. Our final words are dedicated to sterling. EUR/GBP’s test of 0.8864 support failed last week because of horrible UK PMI’s and UK PM Johnson’s suggestion that the lockdown could last until Summer. The EUR/GBP rebound, but failed to close north of 0.89, suggesting the test is still ongoing despite the grim UK economic forecasts.Cable remains near the 1.3746 recovery high.
News Headlines
The French government’s top medical adviser Delfraissy on Covid-19 said the country probably needs to move into a third lockdown because of the circulation of various new variants of the virus. Delfraissy said it would make sense to make the new lockdown coincide with the upcoming school break while also extending the holidays by at least a week. The French government meets and decides on Wednesday.
To compensate for breaching its OPEC+ quota last year, Iraq will cut oil production in January and February. The second-biggest OPEC oil producer will pump about 3.6 million barrels per day compared to an estimated 3.85 million in December. The move follows Saudi Arabia’s decision to curb output earlier this month as it expects demand faltering because of the virus still raging. Brent oil trades unchanged near $55/barrel.
Australian exports surged in December, printing at +16.3% m/m. Despite the ongoing and intensifying trade rift with China, exports to the country jumped 21% with strong Chinese demand for iron ore in particular. Along with a 8.8% decline in imports,the December trade data led to the fourth largest monthly trade surplus for goods on record
