Markets

A jittery sentiment remained the key driver today due to lack of a meaningful economic calendar. Investors took a more guarded approach as fears of the coronavirus spreading now also outside of China are growing. Stocks decline up to 1% in Europe, gold advances to the strongest level since 2013 and core bonds grind higher. US yields fall -1 bps (2-yr) to -3 bps (30-yr). A speech by Fed vice chair Clarida delivered few new insights. He is still optimistic about the US economy but reiterated Powell end of last month by saying that they are monitoring corona closely but that it is still too early to assess potential implications for the US. The German yield curve also bull flattens as yields slip -2.2 bps at the long end. Intra-EMU spread changes vs. the German 10y yield were rather limited, with Greece (+2 bps) and Italy (-3 bps) being the under/outperformer. On FX markets, EUR/USD stayed most of the day in the defensive, hoovering near recent lows around the April 2017 gap. The couple suddenly spiked higher as US dealings started to kick-off. We saw no apparent reason other than a technical squeeze. However, it did erase the intraday loss. EUR/USD is now trading unchanged in the low 1.08 area. Tomorrow’s PMI’s will play an important role in the short term fate of the pair. We were also keen to see the Japanese yen’s reaction after tumbling against the dollar but also against the euro yesterday. It turns out the slide simply continued today, suggesting that the yen currently is more susceptive to potential economic damage from the coronavirus rather than to the overall risk climate. EUR/JPY settled at 121. USD/JPY is flirting with the 112 barrier, the highest level since April 2019.

UK retail sales printed a lot stronger than markets were expecting. Headline sales rose 0.9% m/m after a poor December (-0.5% m/m). Excluding car fuel, retail sales rose even 1.6% m/m as oil prices tumbled throughout January. CBI data (total orders) also came in slightly better. The index extended its rebound to -18, the highest level in 6 months. CBI said that British manufacturers are starting to become more optimistic about the outlook. Sterling failed to profit from the overall better-than-expected figures though. EUR/GBP neared 0.84 (from 0.836) before topping out and trading at 0.838 currently. The move supports our hypothesis that the pound discounts enough positive news for now (UK economy bottoming out, anticipation on fiscal stimulus). Tomorrow’s UK PMI’s will be key though. Will the post-election optimism among businesses hold throughout February?

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News Headlines

The IMF is advocating a restructuring of Argentina’s government debt with a substantial contribution of private creditors. The Fund assessed that Argentina’s debt and debt servicing capacity has deteriorated decidedly. It sees efforts of the government to bring down debt to manageable levels not economically nor politically feasible. A debt operation with a meaningful contribution of private creditors is required to restore debt sustainability.

The U.S. Department of Agriculture announced that biofuels should  make up 30% of U.S. transportation fuels by 2050.  With the biofuel goal measure, the US government intends to raise farm production by 40% and cut the farm sector’s environmental impact by 50%.

The Brazilian real set an all-time low against the dollar today. Earlier, the Brazil central bank announced to lower the banks’ reserve requirements in a move to free additional liquidity to be available to support the economy.

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