Markets
The market reaction on Friday’s payrolls was at least remarkable. November US payroll growth slowed more than expected from 610 000 to 245 000. Other details were also mediocre. Markets hesitated, but finally decided to further play the reflation theme. The loss of momentum in the labour market could put pressure on Washington to speed up the roll-out of a bipartisan stimulus package. US equity indices closed about 0.75% higher. The US yield curve bear steepened with yields rising between 0.2 bps (2y) up to 8.1 bps (30y); not the standard reaction on weaker payrolls. European bonds to a large extent disconnected from US T’s. German yields moved between little changed (2-5y) and +2 bps (30y). Market talk/rumours that ECB stimulus could be generous, supported European bonds. The dollar traded in the defensive in the run-up/at the start of US dealings. EUR/USD even touched a minor new correction top, but the dollar staged a late-session comeback. EUR/USD finished at 1.2121. EUR/GBP showed some volatile swings going into a weekend that was once again deemed ‘crucial’ with respect to the EU-UK trade negotiations. However, in the end, the pair closed the day little changed near 0.9025.
Asian markets are more cautious to join the reflationary interpretation of disappointing news. Chines foreign trade data show how the country is profiting from ‘pandemic-related’ demand for its goods. Regional equities show a mixed picture with Japan and China even underperforming. Reports that the US is preparing additional sanctions against China on its political interference in Hong Kong, dampened sentiment. Oil ($49/b) trades off last week’s top. The dollar decline takes a breather with the TW dollar (DXY) trading near 91.80. EUR/USD hovers in the 1.2130 area.
The eco calendar is almost empty today. The focus turns to political topics (US stimulus, EU budget veto threat of Poland and Hungary, EU Summit, brexit) and to the ECB policy meeting. Given Friday’s remarkable rise in US yields, we also keep a close look at the US Treasury’s mid-month refinancing operation (3y-10y-30y). For now, there is no obvious trigger to row against the well-established reflation trade. Even so, maybe the move is prone for a pause especially in absence of positive news on the topics mentioned above. Or will the ongoing rise in US infections return as a market theme? For US yields, we’ll look out whether price concessions for the auctions will push the 10y yield for a test of the 1% barrier. European bonds probably will be protected in the run-up to Thursday’s ECB meeting. The dollar downtrend is well established and the technical picture for the US currency worsened further last week. Even so, USD selling might slow at least temporary if the reflation trade takes a short-term breather. Sterling opened weaker this morning as there was no noticeable progress in EU/UK trade talks this weekend. We expect more erratic trading in the EUR/GBP 0.90+ area as long as there is no white smoke on an agreement.
News Headlines
Chinese exports rose by 11.4% Y/Y in USD terms in October (vs 9.2% Y/Y consensus) while imports rose by 4.7% Y/Y (vs 8.6% Y/Y forecast), resulting in a monthly trade surplus of $58.4bn. Especially trade with the US recovers fast in order to meet target set out in the Phase 1 trade deal between the two nations. This year’s rapid recovery of exports is one the main reasons why China, in contrast to the rest of the world, will end this pandemic-year probably still with a (small) positive GDP print. The OECD last week estimated a 1.8% GDP rise for the 2020 calendar year.
S&P Global expects global debt to reach $200tn this or 265% of world GDP. The 14 percentage point rise obviously comes on the back of the Covid-triggered recession and accompanying borrowing spree. S&P adds that the debt problem is unlikely to cause a near term debt crisis, provided economies recover, vaccines are widely distributed, interest rates remain very low and borrowing behavior moderates.
