Markets
Core bonds remain on a slippery slope. German Bunds underperformed UK Gilts and US Treasuries with a Bloomberg interview with German ECB board member Schnabel setting things in motion from the start. Schnabel feels rather comfortable with both market and survey participant expectations that the next rate move is going to be a hike, albeit not anytime soon. She’s the first official to put it that bluntly. The market implied probability that the ECB will still have to lower rates first (next year), long the side on which markets erred, is now less than 5%! The probability of a rate hike over the same period is as small, but the market clearly holds a hiking bias from 2027 onwards. Schnabel argues that the decline in core inflation has stalled at a time when the economy is recovering, the output gap is closing and fiscal policy is expanding, all of which tend to be inflationary. Since the December ECB forecasts, which put growth at a 1% low point for next year, the outlook has brightened with actual Q3 GDP pointing at a resilient economy and the degree of global uncertainty receding further. On inflation, she’s not inclined to let the likely delay in the EU’s carbon-pricing system alter her thinking. The ECB can tolerate moderate deviations from target. On the balance sheet, Schnabel says that the currently bond roll-off (QT) is progressing smoothly with stable money market rates pointing at ample liquidity. It’s different to point at which stage the ECB will have to stop like the Fed did last week. She suggests that the ECB uses a time range going from as soon as H2 2026 to “much later”. Daily changes on the German yield curve range between +2.2 bps (30-yr) and +5.7 bps (5-yr). EU swap rates add 1.5 bps (30-yr) to 5.5 bps (5-yr). From a technical point of view, German yields rise to levels last seen at the end of Q1 this year when Chancellor Merz’ budget turn triggered reflationary spirits. The German 30-yr yield trades at 3.45% for the first time since 2011. EU swap rates equally move to highest levels since March at the shorter tenors. The EU 10y & 30y swap rates already breached that technical mark to match levels last seen in respectively July 2024 and October 2023. Current changes on the US curve vary between +1.1 bp (30-yr) and +3.2 bps (5-yr). The euro tried to profit from the interest rate support with EUR/USD initially going from 1.1550 to 1.1570 but the move again lacked steam. The pair is currently back at opening levels awaiting key events tomorrow (vote on French social security bill) and on Wednesday (FOMC meeting). Stock markets started the week very mixed with the EuroStoxx50 and S&P 500 both flat at the moment of writing.
News & Views
In the Bank of International Settlements’ newly published quarterly review, one particular topic attracted the attention of financial media. A box article titled “Bubble conditions in US equities and gold?” states that both asset classes entered what the authors call “explosive territory” the past few quarters. This happening simultaneously is the only time in at least 50 years. “A typical symptom of a developing bubble is the growing influence of retail investors trying to chase price trends”, the BIS said, revealing that it was mostly retail investors who recently poured money into US equities and gold funds. Institutional investors meanwhile took money out of US stocks or maintained flat positions in gold. The BIS said retail investors’ “growing prominence could threaten market stability down the road, given their propensity to engage in herd-like behaviour, amplifying price gyrations should fire sales occur.” The warning, particularly for stock market valuations, is not at all the first. The likes of the IMF, BoE and ECB have all previously identified the matter as a market risk.
China’s annual trade surplus for the first time ever surpassed the $1tn mark in November and thereby already exceeding last year’s 12-month record. Exports grew a strong 5.9%, outpacing the 1.9% import increase. US-bound shipments again plunged, by 29%, following the import levies but were more than compensated by exports to the likes of the EU (+15%) and Africa (+28%). Trade as such remains a key driver for the Chinese economy, despite pledges and efforts to boost the domestic side of the equation. Meanwhile, the huge surplus with the EU triggers frustration. French president Macron last week for example warned “strong measures”, including tariffs, may be needed if China fails to address the trade imbalance.
