Markets
Global market sentiment already underwent quite a sharp U-turn during the first 36 hours of 2020 trading. Investors started the new year with a positive bias. Equities extended the positive momentum from last year. The PBOC easing credit conditions via a reduction of the reserve requirement ratio was seen an indication that global monetary (and probably also fiscal) authorities intended to support the continuation of the economic cycle. The risk-on trade spread from Asia to Europe. US equities indices rushed to new record levels. Bonds remarkably didn’t join the reflation trade. On the contrary, both the German and the US yield curve bull flattened. A soft EMU final PMI and the PBOC easing apparently ‘convinced’ investors that global monetary conditions will remain growth supportive. German yields were little changed at the short end of the curve, but the 30-y declined 4 bps. US yields showed a similar move, with the long end outperforming (30y -6 bps). Even gold profited from the global asset market rally! On the FX market, the price action also showed quite an unusual reaction, given the global risk rally. EUR/JPY, traditionally a barometer of global risk sentiment, declined with both USD/JPY (close at 108.57 from 108.76 open) and EUR/USD (close at 1.1172 from 1.1212) losing ground. Sterling also eased (EUR/GBP close at 0.8499) after a poor UK manufacturing PMI as investors look forward to (difficult) next steps in the UK-EU trade negotiations.
Overnight, the market story changed again as a US airstrike in Iran killed a high-level Irian military leader. Sentiment turned risk-off as investors ponder the risks of an escalation in the US-Iran conflict. Brent oil jumped north of $68p/b. Most Asian equity indices turned negative after (modest) opening gains, but for now losses are contained. Oil-related assets/markets (Australia) even outperform. Safe havens like Bunds and US Treasuries extend yesterday’s rally. On the FX markets, yen buying pushed USD/JPY to the 108-area. Moves in EUR/USD are modest. The pair is testing yesterday’s lows (1.1165 area).
Today, the eco calendar contains French and German December CPI’s and German labour market data. German headline inflation is expected to rebound from 1.2% to 1.4%. In the US, the manufacturing ISM is expected to rise from 48.1 to 49.0, but is still seen in contraction territory. Of course, market action will in the first place be driven by the fall-out from the US airstrike. In se, the first risk-off reaction should be core bond supportive. However, if there is no immediate reaction from Iran, the rebound of core bonds might be modest. Inflation expectations already showed tentative signs of bottoming of late and a further rise in oil prices also is a mixed/tentative negative signal for bonds. Peripheral (EMU) bonds might underperform. On the FX markets, the yen probably remains will bid. However, considering recent price action, any safe haven gain of the dollar against the likes of the euro might be modest. The EUR/USD 1.1100/1150 area might be a rather solid support. A risk-off context also doesn’t help sterling. The EUR/GBP cross rate this morning rebounded further north of the 0.85 barrier.
News Headlines
Oil prices surged by more than 3% (Brent at $68/b.) after the US responded to an assault on the US embassy in Baghdad with an airstrike, killing the head of the Iranian elite force and fueling fears of an escalation in the Middle East. Iran threatened with “severe retaliation”. Gold rose to $1.542/ounce (+1%).
Spain’s interim prime minister Sanchéz (PSOE) managed to secure backing from Catalonia’s largest separatist party, ERC. The ERC said it will abstain in a confidence vote next week which would pave the way for a leftist coalition between PSOE and Podemos, supported by other smaller parties.
China is expected to stick with its inflation target of 3% in 2020, Reuters was told by sources. Speculation grew that Beijing would raise the target to provide room for authorities to increase stimulus and boost the economy. The economic growth target is likely to be set on 6% for next year and will rely on increased state infrastructure spending.
