- European equities trade mostly in positive territory with the German Dax outperforming (+0.75%). US stock markets opened with small gains after yesterday’s close (Thanksgiving).
- Germany’s Social Democrats are ready to talk to their conservative rivals about the formation of a government led by Angela Merkel in a potentially decisive move to break the political deadlock in Berlin. Martin Schulz, SDP Chairman, said that if the SPD decides to take part in government, the decision will be put to a vote of its members.
- German companies are more confident than ever as they tap into the global economic upswing. The German Ifo institute’s business climate indicator climbed to 117.5 from a revised 116.8, beating economists’ estimates for the gauge to remain unchanged. The increase was mainly driven by the forward-looking "expectations" component.
- UK households withdrew money from their tax-free savings accounts at the fastest rate on record in October, whereas businesses built up their cash reserves instead of investing, highlighting the impact of the Brexit-induced squeeze on living standards and business confidence.
- Ireland’s minority government looked set to collapse after the party propping it up (Fianna Fail) submitted a motion of no confidence in the deputy prime minister, weeks before a summit on Britain’s plans to leave the EU.
- Financial markets have understood the Bank of England’s message on future interest rate policy, although the Brexit process risks throwing things off course, new BoE policymaker Tenreyro said in an interview. Two more hikes are likely needed in the next 3 years to meet the inflation goal.
Rates
Stuck in no man’s land
Global core bonds are stuck in no man’s land. The Bund and US Note future moved respectively in a 60-tick and a 16/32 sideways range this week. Traded volumes remained low with US trading desks thinly staffed because of Black Friday. The Bund initially lost ground today, but was already almost at the intraday low when the German Ifo printed a very strong business climate indicator. Progress in German coalition talks (SPD backtracks on previous commitment to move to opposition) positively impacted risk sentiment during European dealings. Brent crude remains upwardly oriented and close to multi-year highs, betting on significant oil production cut extension at next week’s OPEC-meeting in Vienna.
At the time of writing, German yields shift around 1.5 bps higher across the curve. The US yield curve bear steepens slightly with yield changes varying between flat and +1.7 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany widen up to 2 bps. There’s no specific Irish underperformance even if the country entered a political crisis which will most likely result in fresh elections. The main opposition party announced a no-confidence vote against deputy PM Fitzgerald. PM Varadkar, who rules a minority government, said he won’t abandon his deputy.
Currencies
EUR/USD clears 1.1880 resistance
Recent trends of euro resilience and USD softness simply continued today. The euro was supported by a very strong German Ifo business confidence. Even so, USD weakness prevailed. positive risk sentiment and neutral interest rate markets were insufficient to stop the bleeding for the US currency. EUR/USD is testing the 1.19 big figure. USD/JPY struggles to remain above this week’s low.
Asian markets showed a diffuse picture overnight. Most regional indices traded near opening levels. Mainland China initially underperformed, but losses were smaller than yesterday and indices reversed the losses towards the end of the session. The dollar tried a rebound after a two-day setback. USD/JPY returned to the 111.50 area, but the US currency didn’t regain ground against the euro. EUR/USD held around 1.1850.
European equities opened little changed, but soon started a gradual intraday uptrend. Core yields rose slightly early in the session. A very strong German Ifo business confidence supported the moves. Interest rates differentials between the euro and the dollar basically hovered sideways. The dollar gained a few ticks against the euro and the yen at the start in Europe, but the move lacked momentum. EUR/USD turned back north, starting the test of 1.1880 resistance. USD/JPY came again under pressure despite positive equity sentiment.
Fortunes for the US currency didn’t improve as US traders returned from Thanksgiving holiday. EUR/USD broke beyond 1.1880 resistance and tries to stay north of the 1.19big figure. Headlines that the SPD considers to join a German government coalition maybe added to the euro’s positive momentum. USD/JPY (111.40) still trades north of yesterday’s low, but the picture isn’t convincing. The dollar remains under pressure ignoring signals from other markets. A return to the 1.2092 top might be on the cards if the EUR/USD break above 1.1880 is confirmed.
Sterling trading mixed as Brexit uncertainty lingers
Sterling was captured in technical, order-driven trading. EUR/GBP gained a few more ticks north of 0.89, supported by the rise of EUR/USD. Cable profited from an overall weak dollar. Bank of England member Tenreyro repeated that two more interest-rate increases will probably be needed to get inflation back to target over the policy horizon. However, Brexit can force the BoE to adapt its policy response. UK PM May arrived in Brussels for a EU summit and will meet several EU leaders including EU president Tusk. The UK wants progress in the Brexit negotiations in return for a higher UK payment for the separation bill. However, for now it is unclear whether the EU will consider the UK’s concession sufficient. Amongst others, the issue of the Irish boarder remains a hard nut to crack. EUR/GBP trades near 0.8920. Cable hovers in the 1.3340 area.
