Today, investor uncertainty on the impact of the respiratory virus in China eased. Especially US equities are resuming their record race, supported by earnings results from some bellwethers. There were few economic data, but some political topics weighed on European markets. In Italy, Luigi Di Maio resigned as leader of the 5SM. Di Maio is said to stay in place as foreign minister. Even so, the move is seen as another indication that cohesion within the government is under pressure from declining approval ratings. More or less at the same time of the headlines on the resignation of Di Maio, US president Trump in Davos threatened to impose tariffs on European cars if the EU doesn’t make concessions in the trade negotiations between the two. Both stories dampened enthusiasm among European investors. EMU equity indices mostly show modest losses, underperforming the US.

The reaction on the interest rate markets and in FX trading was modest. Core bonds retain recent gains. US yields decline marginally, with the 30-y slightly outperforming (-1.5 bp). German yields decline between 0.5 bp and 1.0 bp across the curve. 10-y intra-EMU yield spreads versus Germany show only marginal changes. The 10-y German-Italian spread jumped up and down intraday. Currently it trades about 3 bps wider.

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In the FX market, EUR/USD held a remarkably tight sideways intraday range roughly between 1.1075 and 1.1100. Headlines on the US-EU trade tensions and on Italy only caused a limited, temporary dip. The 1.1066 support again ‘survived’. The pair trades currently again in the 1.1085 area. USD/JPY rebounded north of 110 in Asia this morning, but failed to extend gains. The pair is drifting back below the 110 handle at the moment of writing.

Over the previous days sterling already enjoyed a positive trading momentum even as investors still pondered the chances of a January BoE rate cut. Yesterday, the sterling bid was reinforced by a solid UK labour market report. Today, the sterling rise accelerated after the publication of CBI orders and confidence data. January CBI orders (-22) extended the gradually improvement from the previous months (-28 in December, cycle bottom -37 in October). At the same time, the quarterly CBI optimism skyrocketed from -44 to +23, the highest level since Q1/2014. UK yields currently are up to 2.5 bps higher compared to yesterday’s close, with the short end of the UK yield curve underperforming. Markets currently see about an equal probability of a 25 bps rate cut and an unchanged decision on January 30 (65%+ probability earlier this week). The ‘reversal’ in rate cut expectations/interest rate support, triggered a new upleg of sterling. EUR/GBP is testing the 0.8450 support. A break below this area would push the pair out of a ST consolidation range and improve the ST technical picture for sterling. Friday’s UK January PMI probably will be a key for the BoE January decision. Cable also extended recent bottoming and jumped north of 1.31.

News Headlines

Speaking at the World Economic Forum in Davos, US president Trump said he wants to seal a trade agreement with the European Union before the US elections. Trump renewed claims that the bloc is unfair to the US and negotiating a deal with Brussels is in many ways harder than the phase 1 deal brokered with China. The president struck a harsh tone and threatened punitive action against the EU if the bloc refuses to find middle ground before the election deadline. The US is also sparring with the bloc over a disputed tax on digital services. US TS Steven Mnuchin labels the tax “discriminatory” and threatens retaliatory tariffs on automobile imports.

A fresh wave of political risk is working its way through Italy after Luigi Di Maio resigned as leader of the anti-establishment Five Star Movement (5SM) today. Di Maio’s exit has unsettled investors wary of another standoff between Rome and Brussels. Di Maio’s exit calls the viability of the country’s coalition government into question, likely triggering a snap election that could install right-wing populist leader Matteo Salvini as premier.


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