Global core bonds gained ground even as risk sentiment was fairly positive. Asian markets closed this morning with gains but European markets opened cautiously at first. China’s Ministry of Commerce confirmed the mid-level trade talks with the US. However, topic of the day remained the ECB policy decision and president Draghi’s Q&A afterwards. In the run up, disappointing EMU PMI’s supported the possibility for a softer ECB. It pushed German Bunds higher and gave US Treasuries direction as well. As widely expected, the ECB held policy rates unchanged and will continue to reinvest maturing QE debt. However, the ECB acknowledged that the risks ‘have moved’ to the downside (instead of ‘are moving’ at the December meeting). Draghi added that a country- or sectorial-specific case is not sufficient for a new TLTRO, but that it needs to be a ‘monetary policy case’. The German yield curve is moving down with changes varying between -0.2 bps (2-yr) to -3.2 bps (10-yr). US Treasuries received some additional tailwind as US Commerce Secretary Wilbur Ross said the US and China are “miles and miles” away from a trade agreement. The US yield curve shifted lower with changes in the range of -2.1 bps (2-yr) to -3.1 bps (5-yr). Italian BTP’s moved higher as well, leading the way for other peripheral bonds too. However, credit spreads over the German 10-yr yield remained rather stable.

The focus for EUR/USD trading was on the EMU side today as the EMU PMI’s unexpectedly declined further. The composite PMI (50.7) is nearing the 50 boom-or-bust level. The German manufacturing PMI and the French services PMI dropping below the 50 mark attracted market attention. European yields and the euro nosedived. EUR/USD dropped to the 1.1330/40 area in the run-up to the ECB policy decision. At the ECB press conference, Draghi admitted that the risks to the economic outlook have shifted to the downside (but mostly due to external factors and market volatility). EUR/USD tested the 1.1309 support area, but bottomed as Draghi said to be confident that inflation will evolve toward the 2.0% goal and as he sounded quite conditional on new TLTRO’s. US/German interest rate differentials are little changed given the EMU headlines. EUR/USD trades again in the mid 1.13 area. The equity rebound slowed during the ECB press conference and weighed on USD/JPY as well (currently near 109.55).

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The recent impressive sterling rebound slowed today. Markets have apparently adjusted positions to bring them more in line with the (perceived?) lower probability of a no-deal Brexit. There was also little news on what the next concrete step in the Brexit process might be. Contrary to what was sometimes the case lately, there were no (constructive) UK eco data to reinforce the sterling short-squeeze. EUR/GBP briefly filled bid just below the 0.87 handle, but the sterling bid petered out. Another brief euro-dip during the ECB press conference was also reversed. The pair trades currently again in the 0.8715 area. The 0.8656/21 supports are coming closer, maybe also caused by some profit taking on EUR/GBP shorts. Cable also returned off intraday highs just below 1.31, but the pair is still holding well north of the 1.30 psychological barrier.

News Headlines

The Norwegian central bank left its policy rate unchanged at 0.75%. The bank mentioned weaker than projected global growth but with the economy nearing full capacity, a tightening labor market and inflation close to target, the bank remains on track for a second rate hike in March.

EMU PMI’s edged closer to the boom/bust-mark (50) in January. Eurozone manufacturing confidence declined to 50.5 from 51.4. Services PMI slipped to 50.8 (51.2 in December) while the composite hit 50.7 (51.1). The decline is widespread among the sub-indicators as new orders, exports, employment and output all fell multi-year lows. Respondents’ concerns focus on international trade tensions, Brexit, rising political stress and a weak auto sector.


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