- European equities traded choppy in this week’s opening trading session. At the time of writing, they lose around 0.25%. US stock markets opened narrowly mixed.
- Germany’s political stalemate showed signs of easing as the Social Democrats started haggling over terms of a renewed coalition with Chancellor Merkel’s conservative bloc rather than outright blocking an alliance between Germany’s two biggest parties.
- EU authorities have approved Ireland’s plans to pay off the last of its crisis-era bailout loans from the IMF early, in a move the government claims will save it around €150m in debt servicing costs. Ireland will repay the remaining €4.5bn from €22.5bn in IMF rescue cash and another €1bn in bilateral loans from Sweden and Denmark.
- The Senate tax bill is headed for a marathon debate this week with the aim to hold a floor vote as early as Thursday. Should it pass, Republican leaders will have to hammer out a compromise between different provisions in the House and Senate bills.
Rates
Core bonds marginally higher in uneventful session
The Bund opened the session unchanged and traded a bit erratic throughout the European session, but overall with a positive bias. The changes are minimal and technically insignificant. The eco calendar was thin and ignored. Equities and oil prices traded range-bound. In this context, the moves of core bonds were range-bound too, but with a slightly upward bias. The US curve flattening was modest, but resumed its trend after a 2-day pause. The German curve was marginally affected. The sole EMU eco releases, Italian economic and consumer confidence, were weaker than expected, but didn’t play a role on trading. Later today, the US new home sales will be released and the Treasury sells 2- and 5-yr. Treasury Notes. We don’t expect these to fundamentally change the course of core bonds.
At the time of writing, the German yield curve bull flattens slightly with yields up to 1.8 bps (30-yr) lower. The US yield curve flattens too with yields up to 0.8 bps higher at the shorter end (2-yr) and up to 1.7 bps lower at the very long end. On intra-EMU bond markets, yield spreads are virtually unchanged.
Currencies
USD selling remains the ‘by default’ FX trade, for now?
There was little economic news in the US or in EMU today. Risk sentiment turned a bit more cautious, even as European losses remain modest. Softer equity sentiment was a good enough reason to keep the dollar in the defensive. USD/JPY dropped below the 111 big figure. EUR/USD set a minor new correction top north of 1.1950. Dollar selling remains the preferred FX trade as long as there is no high profile eco or other news.
Overnight, sentiment on Asian markets gradually tuned negative. China and South Korea took the lead in the correction. Japanese equities reversed an opening gain into a small losses. USD/JPY more or less copied the intraday price action on Japanese equity markets. An initial up-tick was reversed. USD/JPY returned to the 111.40 area. EUR/USD traded little changed near 1.1925.
European equities opened slightly lower, but tried to decouple from the correction in Asia. The tentative European equity rebound temporary slowed the dollar’s decline, but the US currency never gave the impression that even a modest rebound was imminent. Changes in interest rate differentials were negligible and no driver for FX trading. There were further indications that the SPD and the CDU/CSU are moving to real coalition talks for a German government. This might have been a slightly supportive for the euro. However, dollar softness was the dominant FX trend.
This trend continued in US dealings as risk sentiment dwindled. EUR/USD touched a now correction top in the 1.1960 area. USD/JPY also set a new correction low as the pair dropped below the 111 big figure. Dollar selling remains the way of least resistance. EUR/USD trades currently in the 1.1955 area. USD/JPY is changing hands around 110.90. The dollar is still desperately looking for good news.
Cable breaks beyond intermediate resistance
There were no eco data in the UK today. EU and UK negotiators still try to engineer behind closed doors a proposal that might convince EU leaders at the mid-December summit to give the green light for negotiations on the further relationship between the UK and the EU. For now, there are no signs that big progress has been made. Even so, in technical traded, sterling (re)gained a few ticks against the euro and the dollar. EUR/GBP trades in the 0.8935 area. Cable broke above the 1.3348 intermediate resistance and trades in the 1.3375 area. This move is mostly due to USD weakness rather than GBP strength.
