European dealings parted ways with the US session once more yesterday. European equities opened significantly lower in a catch-up move to WS’s losses on Wednesday and never really managed to overturn that sluggish start. Main indices ended 1%-1.5% lower. German Bunds also outperformed US Treasuries. News that Germany would install a fresh lockdown for the unvaccinated triggered a technical break of the German 10-yr yield below key support at -0.35%. Technical selling accelerated the move which also coincided with a Pavlov-like spike lower in oil prices after Saudi Arabia/OPEC+ decided at its monthly meeting to continue reversing production cuts at the planned monthly pace of 400k barrels a day. Given that OPEC+ forecasts suggest that supply is expected to overtake demand in coming months, we wouldn’t be surprised if the cartel at one of its next meetings nevertheless hits the brakes. Brent crude temporarily fell from $70/b to $66/b, but erased all of those losses during the rest of the US session to currently trade near $71/b. German yields closed the day 1.6 bps (30-yr) to 3.3 bps (5-yr) lower. The US yield curve bear flattened with yields adding 7.7 bps (3-yr) to 2.3 bps (30-yr). US Treasuries have been underperforming ever since Fed Chair Powell made his U-turn on the inflation treat to the US economy. More Fed governors unleashed the shackles yesterday, supporting the call to speed up the taper process and create room for rate hikes. The US 10-yr yield did manage to hold above 1.41% support for now. The rebound of US stock markets (close +0.83% to +1.83%) helped hold US Treasuries under pressure. The dollar ended the day stronger (DXY>96, EUR/USD<1.13), but we admit that gains could have been bigger. The USD’s disproportional November frontrunning could be an argument, while EUR investors probably gradually eye the December 16 ECB meeting. Pressure on the Lagarde and co to change tack on inflation and prepare/present an exit strategy is growing bigger every day with record high core EMU CPI prints and the Fed’s U-turn being the latest high level events. In a daily perspective, we are inclined to continue giving the advantage to the greenback though. Today’s eco calendar contains US payrolls and non-manufacturing ISM. Previous Q4 data all bode well for strong outcomes which would continue the underperformance of US Treasuries vs German Bunds and thus help the dollar. Regarding German Bunds, the jury remains out whether yesterday’s partly technically inspired break below -0.35% will hold in a context of rising US yields. EUR/GBP followed the move south of EUR/USD and returned below 0.85. Any EUR-rebound potential remains limited going into this month’s BoE meeting (UK policy rate lift-off).
The US Senate approved a bill that will keep the US Government funded through 18 February, averting a government shutdown as funding would run out at midnight on Friday. The bill was approved by 69-28 after the House of Representatives already gave its approval (221-212). Senate Democrats overcame an attempt of some Republicans to attach an amendment to the bill that would have blocked President Biden’s coronavirus vaccine mandate. However, even after the approval of the funding bill, US Congress still has to address several key issues including raising the federal government borrowing limit of $28.9tn which the US Treasury expects to be reached around December 15. Also, the annual defense policy bill still needs to be approved and Democrats still look for approval of president Biden’s $1.75tn spending package.
The Polish zloty put in a remarkably strong performance yesterday even as sentiment on European markets was very much risk off. The zloty outperformance came after NBP governor Glapinski made a U-turn on his assessment with respect to the temporary nature of inflation. In a move similar to Fed Chair Powell he said that ‘inflation is not transitory, but burdensome’. Polish inflation printed at 7.7% Y/Y in November. Earlier this week, governor Glapinski already changed his view on the merits of a weak zloty. Other MPC members also advocated for a strong(er) zloty to slow inflation. EUR/PLN currently trades near 4.60 compared to 4.70+ levels last week.