- European equities had a strong run today, surfing on the risk-on sentiment triggered by increased hopes of the Congressional adoption of the US tax reform. US equities opened mixed with S&P building out yesterday’s gains and Nasdaq showing modest losses.
- Britain has bowed to EU demands and agreed to fully honour its financial commitments as identified by Brussels, removing one of the biggest obstacles to a Brexit divorce settlement. UK would assume EU liabilities worth up to €100 bln although net payments, discharged over many decades, could fall to less than half that amount.
- Prices in Germany rose faster than expected in November, in an encouraging sign of the resilience of inflation trends in the eurozone as the central bank prepares to start withdrawing its quantitative easing programme. Consumer prices rose 1.8% Y/Y in November, a sharp jump from last month’s disappointing 1.5% Y/Y.
- US GDP grew at an annualised rate of 3.3% in Q3, the highest reading since Q3 of 2014. The improvement reflected increases in business investment, exports and private inventories. However, consumer spending expanded at a slower pace of 2.3%, down from the 3.3 per cent growth notched in Q2.
- In a prepared testimony to Congress, Fed chair Yellen gave a positive health check on the economy’s recent performance and stuck with her existing line on gradual rate rises, but warned that deeper reforms would be needed to generate a "sustained boost" in economic growth without causing inflation that is too high.
- Economic recovery across the eurozone has eased pressures on its financial system according to the European Central Bank’s financial stability review, but concerns over greater risk-taking by investors hunting for returns in low-volatility markets still linger.
Rates
Core bonds under moderate downward pressure
Core bonds were under pressure from the start of the European trading. A first down-leg coincided with a strong opening of equity trading. German inflation data were slightly higher-than-expected preventing any noticeable return action. A second down-leg was triggered by the publication of Yellen’s written testimony before the JEC. She sees the recent low inflation due to transitory factors and calls the expansion increasingly broad-based. Financial risks are muted. She concludes that gradual further tightening is appropriate. So a third rate hike this year in December is baked in the cake. While she won’t be chair anymore in 2018, she looks favourable to more rate increases in 2018.
At the time of writing, the German yield curve steepened with yields up to 4 bps higher. The US yield curve steepened too with yields up between 1.6 bp (2-yr) and 5.6 bps (30-yr). On intra-EMU bond markets, peripherals profited from the risk on climate and narrowed 2-to-4 bps.
Currencies
USD off recent lows, but gains remains modest.
Today, the dollar gained slightly further ground as yesterday’s progress on a tax bill caused some USD shorts to reduce exposure. The dollar received some breathing space as its trades off its recent lows against the euro and the yen. However, US political risk isn’t out of the way and the technical picture didn’t improve in a profound way yet.
Overnight, Asian equities couldn’t fully copy strong WS gains, trading mixed to slightly higher. Rising tensions on North Korean and uncertainty on the impact of measures to prevent excessive leverage in China, amongst others, might have played a role. Yesterday’s USD rally stalled. USD/JPY touched an intraday top early in Asia, but the dollar eased slightly as the Asian trading evolved. USD/JPY traded in the 111.50 area going into the start of European dealings. EUR/USD changed hands in the 1.1860 area.
Early in Europe, interest rate differentials narrowed temporary in favour of the euro. EUR/USD touched an intraday top in the 1.1880, but the gained could not be sustained. EMU data were mixed. French spending data disappointed. EC economic confidence rose to a multi-year peak. First EMU inflation data also gave a diffuse picture. The ECB in its stability report said that EMU stability risks are contained, but mentioned a series of vulnerabilities, including a sudden re-pricing in risk premia. During the morning session, EUR/USD gradually reversed the initial uptick as the dollar found a better bid across the board. However, rising risk on a US government shutdown after Democrats didn’t show up in a meeting with president Trump prevented more pronounced USD gains.
Early in US dealings, the text of Yellen’s written statement before the JEC of Congress was released. Yellen sees the economic expansion as increasingly broad based. It will support faster growth in wages and incomes. Yellen expects the Fed to continue to gradually raise interest rates and reduce its balance sheet. The headlines from Yellen’s speech were less soft than markets expected/feared. US bond yields and the dollar extended their intraday rise. The US Q3 GDP was revised marginally higher to 3.3% Q/Qa, but was largely ignored. USD/JPY took the lead in the USD rebound and tries to regain the 112 big figure. EUR/USD dropped to the 1.1820 area and is currently changing hands in the 1.1835 area. Later today, the Fed will publish its Beige Book, preparing the December 13 Fed meeting. Pressure on the dollar eased as it drifted somewhat further away from the recent lows. That said, the gap is still not big, given the US political risks (Tax bill and potential government shutdown) that are still not yet out of the way.
Sterling extends gradual rebound on Brexit progress
Today, sterling kept a cautiously positive bias, building on yesterday’s gains. The preliminary EU/UK agreement on a divorce bill raises chances that negotiations on the future relationship start after the December EU summit. Ireland’s EU commissioner also suggested that a break-through on the issue of the Irish border could follow soon. Earlier this morning, the UK money supply and lending data came out on the softer side of expectations. EUR/GBP trades currently in the 0.8830 area. Cable trades in the 1.34 area and tries to extend gains beyond the 1.3350 range top, even as the dollar is also better bid. So, sentiment on sterling improved. However the gains are not spectacular indicating that markets still see a lot of Brexit work to be done.
