The coronavirus outbreak in China took a grip on Asian markets this morning and also caused risk-off positioning during European trading hours. After a knee-jerk drop at opening, most European stock markets gradually recouped part of the early losses however, suggesting the issue probably won’t have a profound and lasting impact on market’s thinking (as is the case with the US/Iran conflict). A similar story unfolded on bond markets, with a most noticeable turnaround in German yields. The 10y yield bottomed intraday close to -0.24% before recouping all losses on a (much) stronger than expected German ZEW. The current situation subseries recovered from -19.9 to -9.5, thereby continuing the bottoming out process that started back in October last year. A smaller rise to -13.5 was expected. The expectations component left the lows behind already in August and surged further this month to the strongest level since 2015 (26.7, up from 10.7 and well above consensus of 15.0). The ZEW usually gets less attention compared to the Ifo, PMI and the likes but causes the Bund to underperform today. German yields are trading almost unchanged while US yields decline 2-3 bps across the curve. Peripheral spreads vs. the German 10y yield vary from -3 bps (Greece) to +3 bps (Italy). The narrowing interest rate differential also favored the euro today. EUR/USD escaped from a sideways trading pattern close to but below 1.11 following the ZEW release. EUR/USD is currently trading at 1.111, up from 1.109 this morning. USD/JPY fought its way back above 110 after slipping this morning.

After a batch of weak data last week (industrial production, inflation and retail sales), markets were keen to see how the labour market performed. The November report easily met expectations, with the unemployment rate stabilizing at a record low of 3.8%. Wage growth did slow from 3.5% to 3.4% but still more than compensates for inflation (which amounted to 1.3%-1.4% according to the latest reading). Employment change over the three month period running through November was a whopping 208 000, the strongest growth in almost a year and crushing expectations. The pound strengthened towards EUR/GBP 0.85 on the report. It did little to downplay market’s discounted 60% chance of a BoE rate cut end of this month however. The lagging nature of employment data – and therefore of lesser relevance to the central bank – is probably one of the reasons why. This Friday’s PMI reading will probably tip the scales. Cable rose back above 1.30 (1.306 at the time of writing).

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News Headlines

US Treasury Secretary Mnuchin in an interview with WSJ announced President Trump’s budget proposal will encompass a middle class tax cut, though Mnuchin refrained from shedding a light on the details of the proposed tax cut. Moreover, the US TS asserted the US budget deficit will likely top $1 trillion in the following years.

The next US-China trade deal may not be a “big bang”, US Treasury Secretary Mnuchin stated in an interview with WSJ. The US TS commented on the phase 1 US-China trade agreement, arguing the US can set up additional tariffs if China issues remain unresolved. As far as Europe is concerned, Mnuchin declared there are no planned EU tariffs to enforce Iran sanctions but Italy and the UK would be confronted by punitive tariffs if they decide to proceed with the digital tax.

Eurozone companies’ demand for bank loans unexpectedly fell in Q4/2019 for the first time in 6 years according to the ECB’s bank lending survey. The survey showed a decline in investment needs and the availability of alternative finance contributed to the drop in demand. The Eurozone’s economy has been struggling amid geopolitical headwinds and lower demand which is now starting to show in companies’ decision to curb investment and credit.


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