Markets:
Global core bonds cautiously continue the upward trend of yesterday after the Fed’s U-turn. German Bunds initially followed US Treasuries in a rally higher after the Fed cleared interest-rate hikes probably at least until the Summer while also leaving the option for a slowdown of the balance run-off open. The German Bund opened little higher but investors awaited an avalanche of EU economic data. Germany kicked off with the fastest growth slowdown in retail sales in 11 years in December, while French consumer inflation decreased for a third month in a row. Italy officially entered a technical recession as growth in the 4th quarter printed negative for a second consecutive quarter. Disappointing EMU data and EU equities that gave up early gains and continued to move lower, usually support German Bunds. However, the Bund only moved higher in the run-up to US openings to pair its intraday losses. The German yield curve moves lower with changes varying between -0.1 bp (2-yr) to -2.6 bps (10-yr).US Treasuries initially took a breather today after jumping higher on the Fed’s dovish pivot. Mixed Q4 earnings and weaker than expected jobless claims/Chicago PMI had little impact. UST’s moved higher as US investors joined discussions. The US yield curve edged lower with changes up to -2.5 bps (10-yr). Peripheral spreads vs German 10-yr yield remain more or less stable with Italy underperforming (+3 bps).
The post-Fed USD sell-off slowed today. EUR/USD tried to regain/stay north of the 1.15 big figure this morning, but the move wasn’t convincing at all. European investors were not impressed by the potential positive effects of the new ‘Fed-put option’. European equities showed a lackluster performance and finally slipped back into negative territory. Poor EMU eco data also capped further EUR/USD gains. The dollar probably won’t get any additional interest rate support from the Fed anytime soon. However, the prospect for the relative monetary policy cycle to move in favour of the single currency isn’t obvious neither. US eco data (including jobless claims and Chicago PMI) also disappointed, but with little impact on the dollar. EUR/USD hovers in a tight range close to/slightly below 1.15. USD/JPY (108.55 area) is drifting further south as risk sentiment deteriorated through the day and as US and European yields declined slightly further.
EUR/GBP is holding near this week’s top. Sterling was hammered on Tuesday as UK MP’s instructed PM May to return to Brussels to try to renegotiate the Brexit arrangement regarding the Irish border backstop. This opened a new period of uncertainty on how the separation between the UK and the EU will be solved. This uncertainty will likely continue up until February 14, when a next Brexit vote is scheduled in the House of Commons. A Brexit deal or a delay is still possible, but political visibility remains low. Investors show little appetite to place additional bets on an orderly outcome of the process. Sterling stays in the defensive. EUR/GBP is trading in the 0.8750 area. Cable yesterday rebounded from the mid 1.30 area to the 1.31+ area, but this is USD weakness in the wake of Fed communication.
News Headlines:
More preliminary EMU GDP data confirmed the bloc’s waning economic momentum stretching into 2018Q4. While Spanish growth printed strongly (0.7% QoQ, 2.4% YoY), Italy posted slightly weaker data than expected (-0.2% QoQ, 0.1% YoY), thereby officially entering a recession. Euro zone GDP growth was limited to 0.2% QoQ (1.2% YoY).
One month after launching a cartel probe of euro-bond trading, the EU officially raised antitrust objections over a suspected “collusive scheme that aimed at distorting competition”. Government bond traders of the 8 yet unidentified banks under scrutiny are said to have “exchanged sensitive information and coordinated on strategies”. The transactions under investigation date back to 2007-2012.
