The Asian risk-on rally this morning, following President Trump’s hint at an imminent phase one trade deal with China spilled over into European dealings. The UK election outcome obviously also added to the optimism. Rates in Germany opened another 5 bps higher but soon grinded lower. They retraced intraday gains almost completely after US president Trump dismissed a Wall Street Journal article as fake news. However, it’s unclear to which article Trump is referring. The WSJ wrote about the US reaching an agreement with China but also reported that the latter expressed reservations as the deal has yet to be completed. Markets took some chips of the table, just in case. US stocks open slightly in red, European stock markets left intraday highs behind but stay in the green nonetheless. The German yield curve bear flattens marginally, with yields up 1 bp at the short end but flat at longer tenors. Peripheral spreads narrow overall with the exception of Italy (+5 bps) on recent political events (see headline below). Having rallied already up to 10 basis points yesterday, US yields took a breather already at the start of the trading day. Weaker than expected US retail sales had little impact while Trump’s tweet strengthened the decline. The US yield curve bull flattens as yields slip 4 bps (2-yr) to 2 bps (10-yr). EUR/USD was whipsawed within a narrow trading range near recent highs. The couple is currently trading at 1.116. USD/JPY surged towards 109.7 (recent high) but met with resistance there. Confusion about the any phase one trade deal sent the pair back to 109.3 currently.

With all seats but one distributed, Johnson’s Conservative Party secured 364 of the 650 seats up for grabs during yesterday’s elections. That’s a gain of 47. The Labour opposition lost 59 seats, stranding at a multi-decade low 203. Sterling surged as investors now see the road towards Brexit on January 31 basically cleared of any obstacles and anticipate some kind of fiscal stimulus. EUR/GBP hit the lowest level (near 0.83) since the Brexitreferendum in the mid 2016’s. Cable visited the 1.35 area, the highest since June 2018. It didn’t take long for some profit-taking to take place though. Investors have been positioning for a Tory victory/majority for a few weeks now. A classic “buy the rumour and sell the fact”. EUR/GBP changes hands in the 0.837 area at the time of writing. Cable trades near 1.33.

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Italian Senator Lucidi, who left 5SM together with two other Senators yesterday to join the Lega Nord, warned in Italian newspaper Corriere della Sera that another 20-30 people will leave, possibly to form a new political group. The defections left the ruling coaltion between centre-left and 5SM with a razor thin majority in the Upper House. Elsewhere in Italy, the Bank of Italy cut next year’s growth forecast from 0.8% to 0.5% while also adjusting the 2021 forecast, from 1% to 0.9%. Lower forecasts are mainly the effect of a weaker international outlook.

The German Bundesbank published its biannual report on the economy. The central bank cut this year’s growth forecast further to 0.5%, halved its 2020 growth prediction from 1.2% to 0.6% and marginally increased the 2021 projection to 1.4%. Risks remain tilted to the downside. Growth in domestic demand will probably not be as dynamic as it was during the boom period of previous years. That’s mainly due to households’ real disposable income which slowed given the significant slowdown in employment growth.

November US retail sales disappointed, rising by 0.2% m/m vs 0.5% m/m expected. Retail sales in the control group, most representative for determining consumption in GDP-growth, only advanced by 0.1% m/m. Online retail sales were boosted by Thanksgiving and Black Friday while sales at clothing stores and restaurants were among 5 of the 13 categories to record a decline. Disappointing retail sales could trigger downward revision to Q4 GDP.


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