Markets
Global core bonds rebounded with German Bunds outperforming US Treasuries. The recent uptick in risk sentiment came to a halt as recent good news is starting to be priced in asset prices. The economic data wee of second tier significance. Asian markets reflected the change in market sentiment this morning, as Asian equity indices printed mixed to negative. European equities opened lower, providing some support for core bonds. However, German Bunds proved resilient as the move remained rather limited. The release of the minutes of the December ECB meeting after lunch hadn’t much influence. The German yield curve edged lower with changes varying between ‑0.7 bps (2-yr) and -3 bps (10-yr). Similar story in the US, with only the weekly jobless claims attracting some investor interest.. The claims printed at 216k, slightly better than expected. US Treasuries had little to work with and remained near opening levels throughout the day. With US investors joining the dealings, US Treasuries edged little higher. The US yield curve is moving both ways as changes varied between -1.5 bps (5-yr) to +0.1 bp (30-yr).
The dollar dropped below some significant technical levels yesterday, including EUR/USD breaking out of the 1.12/1.15 trading range. The move was mainly driven by indications from the Fed that policy normalization will likely slow as uncertainty on the economic outlook is growing and as inflation doesn’t pose an immediate risk. The repositioning out of the US dollar slowed today. This slowdown coincided with a pause in risk rebound. There were no eco data to guide FX trading. Interest rate differentials widened slightly in favour of the dollar. This widening was no big issue, but maybe it was a good excuse to prevent further aggressive USD selling at this stage. Several Fed governors, including Chairman Powell are still scheduled to speak later today, but the change in the Fed approach was already well documented of late. EUR/USD is changing hands in the 1.1525 area. USD/JPY stabilizes in the low 108 area.
The Brexit sage clearly entered a new phase yesterday. Amendments in Parliament yesterday illustrated that the government of PM May is losing control on the Brexit process in case PM May’s deal is rejected next week, which remains the most likely scenario. After that, all options are open including general elections, a new referendum or a delay of Brexit in one way or another. In first stage, the process will result in a highly unstable political context. This remains a good reason for investors to avoid all kind of sterling exposure, in particular sterling longs. EUR/GBP after yesterday’s vote jumped above 0.90. The 0.91 resistance is on the radar. Cable (1.2760 area) held up fairly well as the dollar was in the defensive overall.
News Headlines
UK Labour leader Jeremy Corbyn advocated a new general election as a solution to break the deadlock on Brexit. In this scenario, a renegotiation of the of the Brexit deal would probably lead to an extension to Article 50. In the meantime, Jaguar Land Rover said it intends to cut some 4500 jobs mainly in the UK, partly caused by Brexit worries.
The ECB meeting minutes of the December meeting showed that ECB officials considered to downgrade the economic outlook for the euro-area. As president Draghi was set to officially announce the decision to halt bond buying after four years, the downgrade didn’t happen. The ECB agreed that cutting their 2019 growth projections was in itself acknowledging that risks to the outlook had increased.
The Norwegian consumer headline inflation stabilized in December at 3.5% (Y/Y) and 0.0% (M/M) while markets expected a small decrease. Core inflation also declined less than expected. So, the scenario of a March Norges Bank rate hike is still on the table.
