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Growing Unrest in China Setting the Stage for a Risk-off Start


On Friday, US and European bond markets showed a divergent picture as US markets reopened after the Thanksgiving Holiday. US Treasuries continued to outperform. A disappointing US PMI released earlier last week only reinforced the view that there is a strong enough case for the Fed to slow the pace interest rate hikes to a 50 bps step at the December meeting. US yields in the 2-10-y sector eased 1-2 bps with the 30-y gaining marginally. The US 10-y closed the week at the 3.67% support (recent low). The picture in Europe was different. German yields jumped 8.3 bp (2-y) to 12.4 bps (10-y). There was not one unequivocal driver. ECB comments (Schnabel, Muller) suggested that the debate on a 50 bps or 75 bps next step isn’t really decided yet. Recent EMU eco data also were slightly better/less worse than expected (including an upward revision to German Q3 GDP to 0.4% Q/Q on Friday). The German 10-y yield closed exactly at 1.97%, returning the neckline that was broken earlier last week. Equities in the US and Europe both closed little changed. The dollar also showed no clear trend. EUR/USD finished the week at 1.0395 with recent peaks at 1.0448 & 1.0479. DXY closed the week at DXY 105.96, with recent correction lows still nearby. Similar story for the EUR/GBP cross rate (close at 0.8599; with key support at 0.8560 still looming).

This morning, the growing unrest related the new covid restrictions in China is setting the stage for a risk-off start to the new trading week as investors ponder the impact on (global) demand. Early indications on Back Friday spending in the US also show a mixed picture. Asian equities mostly trade in negative territory (Nikkei -0.4%) with Chinese indices underperforming (CSI 300 -1.15%; Hang Seng currently -1,7%). US Treasuries remain well bid with yields declining 3/5 bps currently. Despite the risk-off, USD gains remain modest. (DXY 106.25; EUR/USD 1.0365).The yen even outperforms, with USD/JPY (currently 138.3 near the 137.68 support). China/commodity related currencies underperform (AUD/USD 0.6685, USD/CAD 1.3445) as does the yuan (USD/CNY 7.20, breaking above the 7.17 ST resistance). Uncertainty on global/Chinese demand is pushing Bent oil ($ 81.5 p/b) to the lowest level since January.

Later today, the eco calendar in the US and Europe is thin. We keep an eye at speeches of ECB’ Lagarde, Fed Williams and Fed’s Bullard as the countdown the December ECB & Fed meetings has started. Core bond yields this morning feel some downward pressure due to the China related risk-off. However, the upcoming data (German CPI tomorrow, EMU CPI Wednesday, US consumer confidence (Tuesday), US manf. ISM and PCE deflator (Thursday) and the US payrolls on Friday probably are more important to shape markets view on the pace of Fed and ECB rate hikes. Breaking below 3.67%, the US 10-y yield finds next support at 3.55%. The 10-y Bund stays below the 2.0% barrier. The USD performance this  morning is far from impressive. Even so, it’s probably too early for EUR/USD to return to recent peak levels.

News Headlines

CNB governor Michl in his weekly column for Mlada Fronta Dnes reiterated that stable policy rates are appropriate because growth in the quantity of money is significantly slowing and household consumption declining. His column referred to several points raised in a speech last week where he focused on long term views one of which is that a strong koruna should become a priority for both the government and the CNB. Policy rate will stay high during his term at the helm of the CNB to encourage consumers, businesses and the state to borrow less and save money. He also called on the government to slash the budget deficit, and said wages could only grow hand in hand with productivity to help bring inflation down to the 2% target.

Australian retail sales disappointed in October, dropping 0.2% M/M vs a 0.5% monthly gain expected. Weakness was broad-based across industries with food retailing being the positive outlier. Higher interest rates and faster inflation are effecting Australian households. Part of tourism spending is also back done offshore as borders reopened.

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