Markets
Markets set aside worries about the coronavirus (see headline below) and the potential impact it can have on the economy (ie disruption in supply chains). Instead, the strong Asian session had no problems rolling over into European dealings. Stock exchanges advance up to 1.5%. Core bonds slid with US Treasuries underperforming the Bund. Weaker than expected – admittedly, outdated – December EMU retail sales (-1.6% m/m vs. -1.3% expected) might have capped losses to some extent for the latter. Meanwhile, a blow-out ADP job report inflicted additional pain to UST’s. According to the “unofficial” labour market report, employment rose with a whopping 291 000 jobs, crushing a conservative 157 000 estimate. Details showed a (weather related?) rebound in the manufacturing and construction sector. But the biggest contribution by far came from leisure and hospitality which saw an almost 96 000 rise. It’s the biggest increase in the series on record. The January US non-manufacturing ISM came in pretty close to consensus (55.5 vs. 55.1 expected, coming from 54.9 in December). The US yield curve bear steepened with changes varying from 3 bps (2-yr) to 4.5 bps (10-yr). German yields advance some 1.5 bps (2-yr) to 3.5 bps (10-yr). Peripheral spreads narrow amidst risk on. Greece (-5 bps) outperforms. The widening of the German/US interest rate differential again supports the dollar. The trade-weighted greenback (DXY) failed to pass through the 98-resistance area over the past few days but is now trading at 98.2. EUR/USD 1.10 is fighting for survival.
A surge in the (for markets usually of secondary importance) construction PMI business confidence gave the pound a boost yesterday. Today’s final January services (53.9 vs. a preliminary 52.9) and composite  (53.3 vs. 52.4) series showed an even bigger post-election rebound in sentiment, reaching the highest level since September 2018. EUR/GBP extended yesterday’s decline toward 0.844, almost completely overturning the rise following speeches from EU negotiator Barnier and UK PM Johnson that suggested future trade talks wouldn’t go all smooth. Sterling took a sudden turn for the worse though after headlines appeared that the EU is considering to walk away from concessions done to the UK whilst writing MiFID II rules. Other than to make the trade talks even more difficult, the move could also hurt London as a massive financial hub. EUR/GBP is eventually trading almost unchanged at 0.848. Cable also reversed initial (PMI driven) gains, trading slightly below opening level at 1.30.
News Headlines
The Swedish services PMI surged from an upwardly revised 49.1 in December to 52.5 in January, the highest level since August. Earlier this week, also the manufacturing PMI regained the 50 boom-bust mark (51.5 from 47.7 vs 47.6 expected). Details of the services PMI show significant gains in new orders, employment, business volume and suppliers’ delivery times. The Swedish krone extends the comeback started yesterday. EUR/SEK drops from 10.60 to 10.55 today, with positive risk sentiment obviously at play as well.
Sky reports that the scientist leading the UK’s research into a coronavirus vaccine says his team have made a significant breakthrough by reducing a part of the normal development time from “two to three years to just 14 days”. Chinese media reported a major breakthrough as well, by the country’s leading scientists. The WHO played down the latter report.
Investors were keen to see whether an unexpected rise in the ISM manufacturing confidence was confirmed by the non-manufacturing series. The non-manufacturing measure rose modestly from 54.9 to 55.5, rather close to expectations (55.1). Even so, the report confirms solid growth in this part of the economy. Business activity improved further (60.9). The level of new orders improved modestly (56.2). The sector continues to add new jobs, but at a slower pace (53.1 from 54.8). Price paid also eased from 59.3 to 55.5.
