Markets:
Global core bonds corrected slightly higher today in a news-thin trading session. US yields bounced into key resistance levels at the 5-yr (2.42%) and 10-yr (2.63%/2.64%) tenors with the US senate vote on a stopgap funding bill looming. Rejection would cause a partial government shutdown. US Treasuries tended to profit in such periods in 1995 and 2013. Some cautiousness was warranted in Europe as well ahead of this weekend’s SPD party convention and next week’s ECB meeting. The SPD vote will decide whether or not the party engages into formal coalition talks with CDU/CSU. Saxony-Anhalt, Berlin and the youth chapter of the party already showed their disapproval earlier this week. Regarding the ECB, we think it’s too early to change the communication strategy about APP already and expect such turnaround at the March meeting. Changes on the US yield curve range between +0.5 bps (2-yr) and -1.1 bp (10-yr). The German yield curve steepens with yield changes varying between -1.5 bps (2-yr) and +0.6 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany narrow up to 2 bps with Spain & Portugal outperforming (-4 bps) and Greece outperforming (+4 bps).
Trading in the major dollar cross rates was technical in nature. There were no data with market moving potential. Evidently, there were plenty of headlines on whether or not the US is heading to a partial government shutdown. For now, the impact on markets is limited. There is no indication of risk aversion. US yields stay within reach of the recent highs. The US/German interest rate differential also holds near the ST peak and (European) equities show good gains. The dollar trades mixed to slightly lower. EUR/USD trades little changed in the 1.2235/40 area. USD/JPY feels some more headwinds and returned below the 111 mark (currently 110.60). This might be dollar weakness, but investors maybe also want to reduce yen shorts ahead of next week’s BOJ meeting. The Senate budget vote remains a wildcard for USD trading, but we don’t expect it to be a real game-changer, whatever the outcome.
The focus for sterling trading turns to the December UK retail sales. Sales declined a bigger than expected 1.5% M/M. A fall of only 1.0% M/M was expected after strong November growth. Part of the unexpected big decline was maybe due to issues of seasonal adjustment on Black Friday sales. Even so, Q4 sales as a whole were disappointing. In line with the constructive sterling momentum earlier this week, EUR/GBP drifted to the low 0.88 area before the publication of the retail sales. The reaction to activity data was modest as was the case of late. Even so, the test of the 0.8805/10 intermediate support was rejected. EUR/GBP trades again near 0.8840. Cable jumped to the mid 1.39 area, but also reversed the intraday rebound and trades currently again in the 1.3865 area.
European stock markets gain around 0.5% today with the German Dax outperforming (+1%). US stock markets opened around 0.25% higher, ignoring the looming deadline.
News Headlines:
The Federal Reserve is said to be working to relax a key part of increased capital levels at the biggest banks, a move that could free up billions of dollars. It might bring the leverage-ratio rule more in line with a recent agreement among global regulators, according to sources familiar with the matter.
Racing against a midnight deadline, the US Congress will try to send President Donald Trump legislation to keep the government operating and avoid federal agency shutdowns that would otherwise begin tomorrow.
Canadian manufacturing sales jumped 3.4% in November, their biggest increase in 2-1/2 years, on strength in transportation equipment and petroleum and coal products. Sales set a record high of C$55.47 bn ($44.38 bn) on improved performances in 12 of 21 industries.
