Global markets still traded in some kind of no man’s land yesterday. Persistent uncertainty on the US-China trade war are a lingering binary event risk, refraining investors from building significant directional positions. Global equity indices remain the most sensitive barometer, mirroring swings in investors’ mood on the issue. After positive comments on high level talks during the weekend, markets opened the week with a cautious continuation of the risk-on trading. However, the game was spoiled on headlines of CBNC indicating that Chinese officials were negative on a trade deal as they want a rollback of imposed tariff as a condition. Stocks and core yields declined. However, there was also positive news as the US granted a new extension of a license allowing US corporations to do business with China’s Huawei. Nevertheless, the doubts overshadowed any potential positive developments. During the US session, Fed Chairman Powell met US president Trump and Treasury Secretary Mnuchin. The Fed said that Powell’s comments were in line with his Congressional hearing last week. President Trump tweeted that they also discussed, (negative) interest rates, low inflation, easing, USD strength and its effect on manufacturing. US yields declined slightly further after the headlines on the meeting. At the end of the day, US yields declined modestly between -0.5 bp (30-y) and -2.1 bp (2-y). Changes in German yields were less than one bp on a daily perspective.
On the FX markets, EUR/USD didn’t suffer from the negative headlines on trade. The pair even gained further ground on the headlines the dollar was discussed at the meeting with Fed Chair Powell at the White House. The direct impact of the meeting for the dollar should be limited. In this respect, the USD reaction probably suggests that sentiment on the dollar is waning. EUR/USD closed at 1.1072. USD/JPY finished the day well below 109 at 108.68. Sterling remains in very good shape. Markets feel ever more comfortable with anticipating an election victory of Boris Johnson that is supposed to lead to an approval of the Brexit deal (EUR/GBP) close at 0.8548.
The eco calendar is again very thin today. US building permits and housing starts will probably only be of intraday significance for trading. A speech of Fed’s Williams might provide some insight in the internal debate with the Fed. However, we expect broad support for the Fed shifting to wait-and-see modus. Other markets might again face some erratic trading to the tune of the trade headlines. After the recent risk rally investors might be a bit more sensitive to negative headlines than to positive ones, unless they receive concrete details on a deal. For now, the topside in 10-y US (1.97%) and German (-0.22%) yields is capped by recent top levels. On the currency market, we look out whether the USD correction continues. EUR/USD regaining the 1.1075 area in a sustained way would call off the ST downside alert and could open the way for a return to the 1.1180 area.
Minutes from the RBA’s November policy meeting showed central bankers considered cutting rates this month. However, the Australian central bank recognized the negative effects of lower rates on savers and sentiment, and decided to keep rates on hold as not to spook households. The RBA has cut interest rates three times since June to 0.75% in a bid to spur hiring and investment to accelerate growth in an economy that has slowed sharply in the past year. The central bank reiterated today that it was prepared to ease policy further if needed.
BoJ governor Kuroda commented in Parliament today, signaling the Japanese central bank is content with its current policy stance but it would consider additional easing, including cutting interest rates that are already negative, if risks to the economy were to rise. Nevertheless Kuroda stressed there are limits to how far the BoJ can cut rates or ramp up stimulus, weighing the benefits and costs of further easing.