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Sunset Market Commentary

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Geopolitics continued to dominate trading this morning. Risk aversion reigned through Asia and at the start of European dealings. Brent crude prices temporary surged above $70/barrel, gold prices approached $1600/ounce for the first time since 2013, main Asian equity indices lost up to 2% and core bonds extended their rally. USD/JPY tested first support around 107.89. The dollar’s overall performance was lackluster. EUR/USD even returned higher towards 1.12. Moves of course were all related to escalating tensions in the Middle East. Iran and the US (President Trump) both threatened to retaliate one another with Iran dropping out of the nuclear deal. European markets opened in a similar risk-off mood, but the situation didn’t deteriorate intraday. Traded volumes were extremely low. Geopolitical stress tends to have a rather shelf date as market theme, unless of course we’d get a built-up in military action. Core bonds leveled near opening quotes. German yields shift 0.9 bps (2-yr) to 3 bps (10-yr) lower. 10-yr yield spread changes vs Germany widen by up to 2 bps. US yield changes are limited to 1/2 bps across the curve. Today’s eco calendar wasn’t really inspiring apart from upwardly revised December services PMI in both EMU and the UK. Markets didn’t budge. EUR/GBP drifts slightly south intraday, changing hands around 0.85. Attention shifts to the US later this week. The non-manufacturing ISM will be published tomorrow and closely watched following Friday’s horrible manufacturing gauge. The ADP labour market report (Wednesday) and payrolls (Friday) are also up for release.

News Headlines

Former NY Fed chief Dudley said the US repo market spike in the fall of last year wasn’t a prelude of bigger problems in the financial system to happen. He argued it reflects the difficulties in forecasting banks’ demand for reserves against the background of changes in regulation instead. Dudley calls for a standing repo facility open to counterparties such as Treasury for a more permanent solution.

German retail sales jumped more than expected with 2.1% m/m (2.8% y/y) in November after a poor October performance. The second largest pick-up of 2019 was broadly supported across different categories with clothing and IT printing the biggest monthly rise. In other German data, the final composite PMI was came out higher than the flash reading (50.2 vs. 49.4) thanks to a better services series. New orders in the sector were revised upwardly and enter expansion territory for the first time since August.

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