- European equities shrugged off sharply lower Chinese equity indices in Asia overnight and eked out modest gains with utilities, telecommunication the frontrunners in the EuroStoxx. The US market closure (Thanksgiving) affected trading volumes across markets.
- The ECB’s top officials rallied around the idea of extending its asset purchase programme into a fourth year, but at half the current rate, minutes of the October 26 meeting show. There was "broad agreement" that an ample degree of monetary stimulus was still needed for inflation to reach the ECB’s target."
- The South African Reserve Bank left its benchmark rate at 6.75% after September’s surprising decision to leave rates on hold instead of cutting them. The big test comes tomorrow, when key ratings agencies are due to announce whether they will downgrade the country’s debt – a move that could shove South Africa out of major bond indices.
- The Turkish lira failed to sustainably gain ground after Cemil Ertem, economic adviser to president Erdogan, said the central bank could raise rates "any time". President Erdogan has for years set his face against higher interest rates, a position that has left investors to question the independence of the central bank.
- The beleaguered UK retail sector got a month of respite in November, according to the CBI survey. Almost 40% retailers surveyed said sales volumes were higher than a year ago, with a similar number optimistic that volumes would pick up again next month. Only 13% said sales were down in November, with fewer expecting a drop in Dec.
- Businesses in the eurozone reported their best month of activity in more than 6 years in November with job growth at a 17-year high, according to the Markit surveys. The headline PMI index for the euro area rose from 56 to 57.5, with multi-year highs for all the main indicators of output, demand, employment and inflation
Rates
Uneventful sideways bond trading
German bonds traded uneventful in the absence of US traders (Thanksgiving). Equities and the euro held a sideways trading range as well. The Bund opened slightly higher, but never caught a strong directional bid. As the upside was blocked, traders tried it on the downside. Selling dried soon up though despite strong euro area PMI business sentiment (see headlines). The intraday trading range amounted to 20 ticks divided evenly around the Wednesday’s close (162.99). In the afternoon, the accounts of the October ECB meeting were published. They showed some interesting features, but nothing really new and important (see below). At the time of writing, German yields are marginally higher (flat to +0.7 bps). On intra-EMU bond markets, 10-yr yield spreads versus Germany widened 1 to 2 bps, reversing yesterday’s decline.
The ECB accounts of the last ECB meeting revealed that there was broad agreement on the extent of the bond buying cut (from €60B to €30B). It was still deemed necessary for inflation to reach the ECB inflation target. The slower pace of purchases signaled growing confidence though that inflation would eventually rise. Several alternative solutions were put forward and discussed including a longer extension and one having a clear end date for QE, but the large majority agreed that it was prudent to keep the program flexible. "Several" policy makers also said that the current ECB guidance linking asset purchases to an improving inflation outlook should eventually be replaced" with a reference to the monetary policy stance, in all its dimensions.
The private sector programmes would not be adjusted in strict proportion to the overall scaling down of the APP bond buying. Purchases of these bonds (corporate, ABS and covered bonds) would remain sizeable and scaled back more slowly. Because of the flexibility to spread out reinvestments, the published monthly purchase amounts would likely become more volatile.
Currencies
USD continues to struggle. EU news supports euro.
Global/FX trading shifted into a lower gear today as US markets are closed in observance of the Thanksgiving holiday. The dollar remained in the defensive after yesterday’s soft Fed minutes. At the same time, the euro was slightly supported by strong EMU PMI’s. EUR/USD came close to the 1.1861/80 resistance, but a real test didn’t occur. USD/JPY hovers in the 111.25 area.
Overnight, Asian equity markets traded mixed to lower. Japanese markets were closed. Chinese markets underperformed. Losses mounted up to 3%, amongst others on fear from more credit regulation. EUR/USD held well north of 1.18. This was mainly due to overall USD softness. Speculation on a new grand coalition in Germany was a slight additional supportive for the euro. USD/JPY hovered in the lower half of the 111 big figure.
EUR/USD maintained a cautiously positive bias during the European morning session. Investors still avoided USD longs after yesterday’s ‘soft’ Fed minutes. At the same time, EMU PMI’s were substantially stronger than expected, indicating that EMU Q4 growth might even surpass Q3’s 0.6% quarterly growth. EUR/USD filled offers in the 1.1855 area early in the afternoon session. A real test of the 1.1861/1.1880 resistance didn’t occur yet. Investors are apparently reluctant to take such a ‘big step’ without guidance from the US. The minutes of the October ECB meeting brought the different views that resulted in the ECB policy decision on APP. However, they didn’t bring really new insights. There was no noticeable reaction of the euro. EUR/USD trades currently in the 1.1850 area. USD/JPY hovers near 112.25. The USD sell-off slows, but there is no sign of a turnaround yet.
EUR/GBP returns to 0.89 area
UK Q3 GDP growth was confirmed a 0.4% Q/Q and 1.5% Y/Y today. Consumer spending remained the main driver for growth (0.6% Q/Q). Investments (gross fixed capital formation) was soft (0.2% Q/Q). Later in the session, the CBI November retail data printed much stronger than expected, both for the current sales and for expected sales, indicating that the UK consumer keeps spending going into the holiday season despite negative pressure on the disposable income. The data had hardly any impact on the UK currency. The focus for sterling trading remains on Brexit. UK and EU negotiators are said to work behind closed doors to prepare a document on the progress in the run-up the December EU summit. However, for now there is no concrete news on specific topics. EUR/GBP trades in the 0.89 area This move is at least partially the result of the EUR/USD rally. Cable (1.3310) trades slightly off the overnight top, but remains well bid on USD softness.
