Global core bonds took a different direction today. The Bund trades neutral following a weaker opening (catch-up with overnight developments) while the US Note future suffers additional losses. European equity market strength (>1%) didn’t weigh on the Bund. The new downleg of the Note future occurred following the release of a stellar ADP report (+250k vs +190k expected) which bodes well for tomorrow’s payrolls even if the correlation was rather loose of late. US yields increase by 3.7 bps (5-yr) to 2 bps (30-yr) at the time of writing. The German yield curve trades up to 1.3 bps (5-yr) higher. Peripheral bonds profit from a positive risk sentiment with 10-yr yield spreads vs Germany significantly tighter: -14 bps for Greece, -8 bps for Portugal and -6 bps for Spain & Italy. First Spanish supply of the year was well digested (€3.84bn vs €3-4bn target with 2.05 auction bid cover), while the French auction was below average (€8.11bn vs €8-9bn target with 1.62 auction bid cover).
The dollar showed a mixed picture. The US currency returned most of yesterday’s gains against the euro even as interest rate differentials widened slightly in favour of the dollar, supported by a very strong ADP labour market report. Strong growth prospects for EMU keep the euro well supported against most other majors as well. EUR/USD is nearing this week’s peak, preparing a test of the key 1.2081/92 resistance. At the same time, USD/JPY profited from higher core yields and a buoyant risk sentiment. The pair trended higher in the 112 big figure (currently 112.80 area). The congruent rise of both EUR/USD and USD/JPY pushed EUR/JPY above the 136 mark, the highest level since October 2015.
UK eco data had only a limited impact on sterling trading. The overall rise of the euro helped EUR/GBP to regain the 0.89 barrier. At the same time, cable (currently 1.3535) gained a few ticks as the dollar held a soft bias.
Global equity indices maintain a very strong momentum supported by strong growth data across all regions. Most European equity indices show gains of 1.50% +, the FTSE MIB outperforming with a gain of about 2.5%. US equities also continue the rally that started at the first session of the year. Major US indices opened with gains of about 0.3%/0.4%. Contrary to previous sessions, the Nasdaq underperforms today.
News Headlines
Data published today indicated that the UK economy remains on track for some kind soft landing even as uncertainty on Brexit persisted. The IHS Markit/CIPS services PMI rose to 54.2 in December. The market only expected a stabilization at 53.8. Overall, monthly UK PMI data suggested the UK economy probably grew by 0.4%-0.5% in the fourth quarter. Separate data from the BoE revealed that UK consumers increased borrowing at the slowest pace since mid-2015 in November. Mortgage approvals were slightly stronger than expected.
The EMU economy finished 2017 with the strongest growth in nearly seven years. Activity accelerated in services and manufacturing. IHS Markit’s Final Composite Purchasing Managers’ Index rose to 58.1 in December from 57.5 in November. The December reading was the highest since February 2011.
Payrolls at US companies increased by a strong 250 000 in December, the most in nine months, according to data released from the ADP Research Institute. Other data indicated that initial claims for unemployment benefits increased by 3 000 to a seasonally adjusted 250 000 for the week ended Dec. 30. However claims data at the end of the year might have been affected by specific factors and probably don’t point to a deterioration in labour market conditions.
