The low volatility risk-on context persisted this morning. China Q4 GDP growth and December data suggested that activity was bottoming as trade tensions eased, supporting a benign global investor sentiment. At the same time, recent global price and activity data weren’t strong enough for the likes of the Fed and the ECB to consider leaving an accommodative wait-and-see policy stance. Core yields stayed in consolidation mode during the European morning session. Early morning US data showed a huge jump in US housing starts (+ 16.9% M/M vs 1.1% expected). (Bond) markets mostly don’t react much to housing data, but the outsized surprise this time triggered some modest selling of US Treasuries. The US yield curve bear steppes with yields rising between 0.5 bp (2-y) and 4.5 bp (30-y). Bunds outperform Treasuries with German yields up to 1 bp (10-30y). Intra-EMU spreads mostly show a limited tightening of spreads with Italy outperforming (-6 bp) (cf infra).

The cautious post-payrolls EUR/USD ‘uptrend’ already showed some cracks as the dollar received support from a series of solid US eco data. This trend continued today. The pair already came under further pressure in Europe this morning and the dollar extended gains after strong US housing starts this afternoon. EUR/USD is testing the 1.11 big figure. At the same time some underlying euro weakness was probably also in play. USD/JPY hardly profits from the rise in US yields, the pair hovers in a tight range just above 110.

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Today’s December UK retail sales attracted more than average investor interest. Of late, several BoE MPC members indicated that they were moving ever closer to supporting an interest rate cut if UK eco data don’t improve soon. Recent UK eco data suggested that growth came to a standstill at the end of last year, maybe even worse. Inflation also drifted further away from the 2% BoE inflation target. In this context, investors were keen to see whether UK consumers found a better footing during the last days of the election campaign and immediately after the vote which at last brought clarity on Brexit. The market expected a rebound of more than 0.5% after a decline in sales in the previous months. The hope was in vain. Sales declined further in December (-0.8% M/M ex auto fuel) and the November figure was revised even further into negative territory (-0.8% M/M). Gilts initially declined an additional 2-3 bps for the 2-10 y maturities. The market now discounts about 70% of a January 30 rate cut. Still, the negative impact on sterling was very modest. Sterling traders this morning apparently prepared for a solid sales report. EUR/GBP temporarily filled bids below 0.85 before the retail sales release. EUR/GBP briefly spiked to the 0.8530 area, but the damage for sterling remains contained. EUR/GBP currently trades in the 0.8500 area. Cable hovers in the 1.30 area amid broader USD strength.

News Headlines

Italian bonds outperformed today after the country’s highest court rejected a proposed change in the electoral law. The proposal was a request from Salvini’s Lega Nord who wanted to hold a referendum to introduce a first-past-the-post system. Salvini obviously hoped to gather a landslide victory for the centre-right in such new system.

Iran’s supreme leader Ayatollah Ali Khamenei said that the country’s Revolutionary Guards can take their fight beyond Iran’s borders: “Resistance must continue until the region completely freed from the enemy’s tyranny.” Apart from the “US clowns”, he also targeted EU countries “who cannot be trusted” in nuclear negotiations.


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