Due to our annual Christmas Holiday, there will be no KBC Reports from Monday 18 December 2017 until Tuesday 2 January 2018.
- European equity markets opened with modest losses as sentiment from Asia temporary filtered through. However, there were no follow-through losses. Most European indices show limited losses. US equities resume their uptrend opening with gains of about 0.5%
- The Russian central bank cut its key interest rate by 50 basis points to 7.75% from 8.25%, a sharper cut than expected, and said further cautious reductions were possible in the first half of next year.
- "We will see a persistently high underlying pace of economic growth not only in the final quarter of 2017 and the first quarter of 2018, but also over the remainder of 2018, during which time the German economy will grow robustly," Bundesbank President Weidmann said in a statement.
- The US empire manufacturing index declined slightly more than anticipated in December, from 19.4 to 18.0 (vs 18.7). US industrial production increased by 0.2% M/M following a post-storm 1.4% M/M rebound in October.
- The ECB must be careful to avoid distorting markets with its asset purchases and that is an important factor in deciding when to adjust stimulus, Governing Council member Nowotny said.
- Irelands economy surged in the third quarter, boosted by rising exports and falling imports. GDP rose 10.5% from the year earlier period. The economy grew 4.2% from the previous quarter.
Rates
Start of end-of-year trading
Global core bonds trading shifted into lower gear. With key central bank meetings and eco data behind us, erratic end-of-year dealings might be name of the game for the remainder of the year. Recovering European stock markets didn’t weigh on the Bund or the US Note future. Both contracts traded in narrow, sideways ranges. Spain made an opening gambit to fill the position of ECB vice-president Constancio after he leaves the board mid-2018. Between that date and Q3 2019, also ECB president Draghi and chief economist Praet will be replaced. The ECB Troika are the architects of current ultra-easy monetary policy, suggesting that a dramatic shift in thinking is possible depending on who’ll fill the seats. ECB Nowotny and Vasiliauskas stroke a more hawkish tone today suggesting no additional need for QE. US eco data included a slightly disappointing empire manufacturing and US production data.
At the time of writing, the US yield curve bear flattens with yields rising up to 2.1 bps (2-yr). The German yield curve drops by 0.2 bps (5-yr) to 1.7 bps (2-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are nearly unchanged with Greece outperforming (-11 bps).
Currencies
USD holds tight ranges. Equities slightly supportive
Trading in the major US cross rates was confined to tight ranges today. US eco data were marginally softer than expected but with little impact on trading. The dollar traded soft early in the session, but gained a few ticks later as US equities extended their bull run.
Major Asian equity indices mostly traded in negative territory showing losses between 0.5% and 1.0%. The closely watched BOJ Tankan large manufacturing index rose from 22 to 25, the highest level in 11 years. Other sub-indices also suggest an improvement in the broader economic performance including a tightening labour market and tentative signs of price rises. However, it didn’t change market expectations that the BOJ will maintain its ultra-easy monetary policy in the foreseeable future. USD/JPY held a tight range close to/slightly above 112, near the post-Fed low. Uncertainty on the fate of the US tax bill maybe played a role. EUR/USD traded sideways in the 1.1785 area.
There was no high profile economic news to guide trading in EUR/USD or USD/JPY today. EUR/USD held an extremely tight sideways range roughly between 1.1780 and 1.1810. The subsequent messages from the Fed and/or the ECB were too diffuse to give clear directional guidance for USD or euro trading. The USD/German interest rate differential reversed part of the narrowing since Wednesday (US CPI/Fed). Initially, it was not enough for the dollar to resume the ‘tentative uptrend’ from earlier this week. The US eco data (Empire manufacturing and November production data) came out slightly softer than expected. US equities opened strong giving some downside protection to the US currency. The ongoing political noise on the US tax bill remains a source of USD caution. That said, it looks that USD trading is gradually shifting in yearend modus. EUR/USD hovers around the 1.18 pivot (currently 1.1780). USD/JPY holds a tight range north of the 112 big figure (currently 112.30 area).
Sterling declines despite formal EU Brexit deal approval
There were no eco data in the UK today. Yesterday evening, sterling profited as EU leaders gave quite some verbal support to UK PM May with respect to the agreement on the first Brexit deal reached last week. Today, EU leaders gave formal green light for Brexit negotiations to move the a second stage. However, EU leaders warned that the negotiations on the new trade relationship and on a transition period might be very difficult. Even more, some issues on the divorce bill (Irish borders) will resurface. Sterling opened near the overnight ‘ST top’ against the euro and the dollar, but selling pressure mounted as the day proceeded. EUR/GBP trades in the 0.8840 area, reversing yesterday’s decline. Cable trades in the 1.3325 area. For now, there is no indication that sterling will rise further just because Brexit negotiations move to a next stage.
