Global core bonds lost ground as positive risk improvement persists. Asian equities set the tone and opened higher. The release of Huawei’s CFO (on bail) supported fresh hopes of an improvement in US-China relations. European equities opened higher as well. German Bunds finished yesterday’s session higher, despite the risk rebound, and initially proved resilient today as well. The Bund dropped his defense after white smoke appeared from Rome. The Italian government reached an agreement to lower its budget deficit to 2.0%. Tomorrow, they will present the revised budget to the European Commission. We expect the EU not to offer much resistance, especially with France also set to breach EU budget rules. Italian BTP’s rallied on the news, pushing the Italian 10-yr yield below 3.0% for the first time since September. US Treasuries gradually moved lower, as investors cut more safe haven assets. US November CPI was spot on expectations. Right before the US opening bell, the WSJ said China is preparing to increase access for foreign companies, raising hopes on easing trade tensions. US Treasuries fell further on the news. The US yield curve moved higher with changes varying between +1.1 bp (2-yr) and +2.0 bps (5-yr). The German yield curve moves north as well. Changes range from +2.1 bps (2-yr) to +3.3 bps (10-yr).

EUR/USD wasn’t affected much by the latest brexit developments today (see below). Instead, the currency pair treaded water during early European hours before spiking on reports Italy is to propose a 2% deficit target to the EU. That would be in line with the Commission’s demand and pave the way for a final agreement. US CPI data was spot on and had no significant impact on trading. Another encouraging sign from China to resolve the trade tensions with the US was considered dollar positive. EUR/USD retreated slightly from its intraday “Italy high” around 1.136 to 1.135 currently, still up from 1.132 this morning. USD/JPY trades virtually unchanged from yesterday at 113.4.

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The chair of the so called 1922 Committee Brady Graham announced this morning he received the 48 Tory letters needed to trigger a vote of no confidence in Theresa May. Members of the Conservative Party decide tonight whether or not to topple her as party leader and, by consequence, as prime minister. It requires a simple majority (158 of 315) to send May packing. Sterling reversed initial losses as soon as several high profile Tories expressed support shortly after the news got public. The BBC later reported that at least 158 Tories have said publicly they will vote in favor of May. Sterling rallied to EUR/GBP 0.899 at the time of writing. A clean break of the 0.90 hurdle proves a tough nut to crack for now. If or when May lives tonight, it’s only to fight another day since the (tweaked?) brexitdeal still needs Parliamentary approval. Investors don’t want to get ahead of things much and stay cautious on sterling.

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Swedish centre-left Social Democrats leader Löfven faces a parliamentary vote on his candidacy on Friday. He proposes a minority government with the Green party, but needs some center-right parties to abstain or support his request. It’s the 2nd out of maximum 4 attempts to form a government after Swedish parliament vote against centre-right leader Kristerrson. Market didn’t react to political news, but the SEK did suffer a setback after lower than expected inflation numbers (-0.1% M/M and 2.1% Y/Y) which cast some doubt over a December rate hike.

US CPI inflation printed bang in line with forecasts. Headline inflation slowed from 2.5% Y/Y in October to 2.2% Y/Y in November (0% M/M). Core inflation, which excludes volatile components like energy or food prices rose from 2.1% Y/Y to 2.2% Y/Y (0.2% M/M).


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