Markets

Global core bonds gained ground today as the selloff on equity markets continued. The news that Canada, on behalf of the US, arrested Huawei CFO Wanzhou Meng, weighed some more on investor sentiment, illustrating that the US/China relationship remains very fragile. Asian equities lost ground. Secondary eco data released in EMU wasn’t able to steer trading. European equities opened lower but moved sideways afterwards. The ongoing risk-off sentiment supported Bunds. US Treasuries edged higher as well after markets were closed yesterday. The ADP employment change (+179k) and the jobless claims (231k) suggest an ongoing healthy labour market, but both missed market consensus narrowly (+195k and +231k resp.). We don’t expect data to influence trading much, as sentiment remains clearly in the driver’s seat these days. The rally of Treasuries accelerated somewhat as investors cut the probabilities for more Fed rate hikes next year. Fed governor Kaplan called for patience as inflation “isn’t running away” and forecasts show a slower US growth next year. US yield curve bulls steepens with changes ranging from -4.4 bps (30-yr) to -6.6 bps (2-yr).German yield changes range from -1.1 bp (2-yr) to -4.4 bps (30-yr). Peripheral spreads over Germany widen with Greece (+11 bps) and Italy (+10 bps) underperforming.

Trading in the major FX cross rates again decoupled from the risk-off trade on global equity- and interest rate markets. Investors feared a new flaring-up in the US-China trade war after Canada arrested the Huawei CFO. The risk-off repositioning continued during the European morning session, but the impact on EUR/USD was negligible. The pair eased to the 1.1320/25 area, but even a test of the 1.13 area didn’t occur. EUR/USD easily drifted back higher later in the day. At least for now, the global equity sell-off doesn’t provide clear guidance on the relative monetary policy approach of major central banks. The US-German interest rate differential narrowed further at the short end of the curve, but spread chances were modest at the long end of the curve. Regarding the data, German orders were stronger than expected. US ADP reported softer than expected November job growth. The ADP caused some intraday USD losses, but the data didn’t provide news important enough for investors to change their view on global developments going forward. EUR/USD trades currently in the 1.1385 area, near the intraday top. USD/JPY dropped to the 112.50 area on USD softness and as the yen profits slightly from global risk aversion.

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Sterling also still develops an erratic-like trading pattern as the Parliamentary debate on Brexit continues. UK PM May and her staff were said to consider small changes to the implementation of the back-stop procedure on the Irish boarder. Apparently, it isn’t enough to raise the chances on an approval of the Brexit in Parliament next week. EUR/GBP doesn’t go anywhere hovering near the 0.89 pivot. Cable (1.2770 area) currently avoids a new downside test of the 1.2660 support area.

News Headlines

German Finance Minister Olaf Scholz said that Germany’s debt percentage of GDP may fall below 60% this year as he expects a 2018 structural surplus of 1.75% of GDP. He added the surplus will be “significantly” lower in next years, as federal spending will increase. Current debt/GDP ratio is 64.1%.

Saudi energy minister Khalid al-Falih said that the OPEC+ group would be satisfied with a supply cut of just 1 million barrels per day. Markets were expecting a larger cut between 1 and 1.4 million barrels however. The news sent oil prices south again (-2% – 3% at the moment). Brent dipped below $60 bp again before recovering some of the losses.

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