Market Indecisiveness Gradually Morphed into a Mild Risk-Off

Markets

Market indecisiveness gradually morphed into a mild risk-off yesterday. Profit taking on big tech stocks pushed the Nasdaq 1% lower. Mixed results from major US banks also didn’t help sentiment. Still losses in the likes of the Dow (-0.09%) or the Eurostoxx 50 (-0.41%) were more modest. The US Supreme Court again didn’t give an opinion in the Trump tariff case. The modest risk-off correction for once triggered a traditional rally and bull flattening on core bond markets. US yields declined by 2.3 bps (2-y) to 5.2 bps (30-y). German yields eased between 1.7 bps (2-y) and 3.3 bps (10-y). US eco data were not to blame. Both November producer price inflation (0.2% M/M; 3% Y/Y) and retail sales (headline +0.6% M/M) printed on the stronger side of expectations, but had no noticeable impact on trading. The rebound in bonds mainly occurred later. DXY closed marginally softer at 99.05. However, in a context with little eco news and geopolitical topics dominating the headlines it is difficult for the euro to make progress (EUR/USD close 1.164). Don’t call it a buy-the-rumour, sell-the-fact reaction yet, but after touching the weakest level against the dollar since July 2024 (USD/JPY 159.45), pressure on the yen eased slightly. LDP officials confirmed that PM Takaichi will announce snap elections soon. The Ministry of Finance warned on unidirectional yen moves that are not in line with fundamentals. Question is whether such a soft/hidden suggestion on potential interventions will already be a game-changer for the yen, with a period of political uncertainty still ahead in the run-up to the elections.

Overnight some comments/measures from President Trump eased the recent rally in oil and metals. Oil (Brent $64.4/b) declined after Trump suggested that an attack on Iran might not occur anytime soon. The correction in metals to some extent might be simply profit talking, but was supported by a statement that the US will look for bilateral agreements to secure the supply of critical minerals. The US might also implement a price floor to defend domestic production. Markets see this as the US backing away from imposing tariffs. Asian equities this morning show a mixed picture. US futures gain marginally. The dollar remains well bid overall (DXY 99.15). The yen struggles to extend yesterday’s rebound (USD/JPY 158.6). The eco calendar contains some second tier US and European eco data including Philly Fed Business outlook, jobless claims and the Empire manufacturing survey. In Europe, Germany will published a first (general) estimate of the 2025 GDP growth. We doubt that these data will have a lasting impact. We look out whether the decline in yields is able to continue as first support levels are coming closer (e.g 4.78% area for the 30-y US yield, 2.80% area for German 10-y yield). On FX markets, the dollar holds to upper hand. A break of EUR/USD below the 1.1620/15 area suggests further downside. At the time of finishing this report, UK November production (1.1% M/M and 2.3% Y/Y) and monthly GDP data (0.3%) printed on the better side of expectations. Sterling recently outperformed the euro, with the 0.8650 support area now coming with reach.

News & Views

The Polish central bank kept the policy rate at 4% yesterday. The move was widely expected. The NBP lowered the policy rate last year a cumulative 175 bps. The (short) policy statement noted that annual GDP growth in Q4 would probably be in line with Q3’s more than decent 3.8%. Inflation meanwhile, dropped to 2.4% last month, effectively settling below the central bank’s 2.5% +/-1 ppt target. Core inflation, however, is estimated to have been close to November’s 2.7% after being more than 3% for much of 2025. Against this backdrop that the NBP decided to hold a 4% rate Polish swap rates rose by 4 bps at the front end after the decision, which had more to do with stretched positioning (2-yr swap hit a four-year low in recently). The zloty finished unchanged around EUR/PLN 4.21. Further NBP rate cuts are likely nonetheless with money markets assuming the trough in the cycle at 3.5% by mid-2026.

Policy rates in South Korea held steady at 2.5% after this morning’s CB meeting. The fifth straight hold is considered a hawkish one, with the Bank of Korea (BoK) scrapping a reference to further potential cuts. It shifted instead to a neutral stance in which it “will make its policy decisions, amid supporting a recovery in economic growth, while closely monitoring changes in domestic and external policy conditions.” 5 out of 6 members saw a “high chance” of holding settings steady over the next three months. The change in its monetary stance comes as growth remains resilient, inflation slightly above target but especially as financial stability concerns, tied to the housing market and currency, grow. Even after the decision, the won remains under pressure. USD/KRW rises to 1470.3, just shy of a 17-year lows seen in April last year around 1490. The weak won also drew attention from the US with secretary Bessent just yesterday commenting that the depreciation is not in line with fundamentals..