Markets

Global core bonds are trading mixed today with German Bunds underperforming US Treasuries. European sentiment was positive this morning as investors welcomed the UK Parliamentary vote to avoid a no-deal Brexit at any occasion. EU equity markets moved higher, weighing core bonds down. The Ifo Institute, one of Germany’s most prestigious research institutes, nearly halved its 2019 growth projection to 0.6%, leading German Bunds higher. Rumours that the meeting between US President Trump and his Chinese counterpart Xi Jinping will be delayed to at least April got confirmed today but had little impact on EMU bonds. The German yield curve is edging higher at the time of writing with changes up to +1.7 bps (10-yr). US Treasuries moved sideways this morning but the confirmation of the delay in US-Sino trade talks we a cautious bond-supportive. Weekly jobless claims rose (little) more than expected and January new home sales missed expectations. US equities opened lower, supporting US Treasuries modestly. The US yield curve is mixed with changes in the range of -0.7 bps (5-yr) to +0.3 bps (30-yr). Peripheral spreads over the German 10-yr yield are tightening with Italy (-6 bps) outperforming.

EUR/USD rebounded this week on a constructive risk sentiment, on better (less negative) EMU eco data and as the dollar traded soft ahead of next week’s Fed policy meeting. A positive reaction of European markets after yesterday’s Brexit vote in the UK Parliament propelled EUR/USD to a ST correction top in the 1.1339 area. Today, the bid for the single currency dwindled. The Ifo Institute further downgraded the growth outlook for Germany (0.6% for 2019). Despite yesterday’s vote, the positive impact of recent Brexit developments on the euro also eased. EUR/USD gradually returned to the 1.13 area. US eco data were mixed and didn’t provide any clear directional guidance. USD/JPY rebounded in Asia this morning, but soon settled in the 111.50/70 area. The dollar didn’t receive any additional interest rate support. Sentiment on risk was quite neutral for the USD/JPY cross rate.

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Sterling flourished overnight. Investors adapted positions further as yesterday’s vote in the UK parliament was seen as further reducing the risk of a disorderly Brexit. (Even as a ‘no deal Brexit’ remains the legal ‘by default’ scenario). Sterling trading developed in a more balanced environment today. EUR/GBP hovered up and down mostly in the lower half of the 0.85 big figure. Recent developments were maybe a good reason to reduce sterling short exposure. Question is whether the political and economic prospects on the UK are positive and/or stable enough to warrant outright sterling long positioning. In this respect, BoE’s Haskel warned that recent drop in investment might also affect the UK labour market. He advocated a wait-and-see stance and said the BoE needs evidence of rising inflation before reconsidering further rate hikes. Markets are currently looking forward to this evening’s vote on a delay of Brexit. Even in case Parliament supports a delay, next political steps (both from the UK and from the EU) are not straightforward. EUR/GBP trades currently in the 0.8535 area. Cable is changing hands in the 1.3230 area.

News Headlines

The German Ifo Institute downgraded the 2019 growth forecast from 1.1% to 0.6%. Ifo warns that the German manufacturing industry will largely fail to act as an economic engine this year. Global demand is weak as the global economy continues to lose momentum. The German economy grew by 1.5% last year, the slowest since 2013.

US new home sales missed expectations. A decline of -6.9% m/m was recorded in January vs. a 0.2% pickup expected and well below last month’s 3.7%. Although notoriously volatile and relatively outdated due to the government shutdown, the data did not go unnoticed as stocks slipped after release.

The 21st Century Business Herald reported that Chinese securities regulator instructed brokerages to minimize risks from margin lending and warned analysts to avoid inflammatory language. Last week, China’s largest state-owned brokerage issued a rare sell rating. Chinese equity indices significantly underperformed over the past sessions.

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