Markets

Asian markets shrugged off most intraday losses (China overcame almost completely a 4% loss) or even eked out gains. Europe initially also kicked off in the green. French confidence was little affected by the corona outbreak (yet) but was largely ignored by markets. Corona on the other hand wasn’t. The virus soon hijacked trading again due to lack of other important economic data. South-Korea, Iran and Italy all confirmed another rise in cases, denting sentiment already shortly after the open. Stocks extended yesterday’s decline, printing losses of about 0.8% (EuroStoxx 50). Spain underperforms as it announced it has isolated about 1 000 tourists in Tenerife on coronavirus concerns. Core bond yields declined across the curve though moves remain contained. US yields decline about 1.5 bp. The German yield curve bull flattens with yield changes varying form -1 bp (2-yr) to -2.5 bps (30-yr). The Bund’s slight outperformance might be related to Europe’s increasing involvement in the corona tale (first cases in Austria and possibly Spain) and higher vulnerability towards supply chain disruptions from China and the likes. Peripheral spreads vs. Germany’s 10y yield widen with Greece (+7 bps) underperforming. Spain’s (+4 bps) 30-yr bond auction drew demand in excess of 18bn euro. Issue size was set at 5bn at 86 bps over mid-swap (3 bps lower than initial guidance). Moves on FX markets were equally muted as investors gauge the economic impact going forward. The euro trades a notch lower, 1.084 to the dollar vs. 1.085 opening. The Japanese yen profits slightly from its safe haven status, both against the dollar (110.4) and the euro (119.7).

Today’s CBI data disappointed slightly but as usual didn’t influence sterling trading. Without any other relevant eco figures, trading was left in the hands of global sentiment. EUR/GBP retraced from the 0.84 to 0.835 at the time of writing after recovering from an intraday low at around 0.834. The decline is partially on the back of a weaker euro. However, moves in cable suggest that there is also some pound strength at play which is a bit at odds with the current risk mood. GBP/USD advances from the low to the high 1.29 area.

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News Headlines

Italian deputy economy minister Castelli said the EU should be prepared to give resources to Italy in relation to economic events (coronavirus) that could lower GDP considerably. Earlier, local media reported that Italy was seeking leeway to miss its 2.2% of GDP budget deficit target agreed with the EC. BoI governor Visco estimated the impact this weekend at 0.2% percentage points this year. Italian PM Conte joined the chorus, warning for significant damage.

Two heavyweight CDU members will join forces in the party’s leadership. Moderate candidate Armin Laschet will run for leader while more conservative health minister Jens Spahn joins the ticket as deputy leader. The two hope to outflank Friedrich Merz at the party’s April election. Merz is a staunch advocate of a shift to right. Norbet Röttgen is the fourth, more low profile, candidate.

The Hungarian central bank (MNB) kept its main policy rates unchanged. The average amount of liquidity to be crowded in Q1 2020 is also unchanged at HUF 300-500bn. The stock of (FX) swap instruments has declined since mid-January, causing short-term yields to rise by 40-60 basis points. Banking system liquidity is likely to narrow further. The MNB judges the temporary increase in inflation at the beginning of 2020 as mainly triggered by developments in fuel and food prices, but will hold a fundamental review of its inflation outlook at the March policy meeting.

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