Changes on global core bond markets were minimal today. The German Bund slightly outperformed the US Note future. Moves could have been larger given the weekend’s events: the SPD formally entering German coalition talks, rating upgrades for Greece/Spain and the US government in shutdown mode. US investors apparently have strong faith in the outcome of tonight’s new US Senate vote. The US 5-yr (2.42%) and 10-yr yields (2.63%/2.64%) marginally surpass key resistance levels; but we consider the test as ongoing. Changes on the German yield curve range between -0.1 bp (2-yr) and +1 bp (10-yr). The US yield curve flattens with yields up to 2 bps lower (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are close to unchanged with Spain (-3 bps) outperforming following this weekend’s rating upgrade into "A" category (A-, stable outlook).
Trading on global FX markets remained very orderly even as the US Senate failed to strike an agreement on a funding bill, triggering a government shut-down. The dollar opened with a slight negative gap in Asia, but soon returned to Friday’s opening levels. Later in the session, USD/JPY (currently 110.75) held a very tight range. The dollar ceded temporary ground against the euro in European trading, but EUR/USD (currently 1.2245) stayed well off the intraday top (1.2275 area). The LT US/German interest rate differential narrowed marginally, but European yields had till some catching up to do on Friday’s US moves. Whatever, the USD price moves were modest and without clear trend. Investors simply stay sidelined and try to assess how long this stalemate will last. Other event risk includes tomorrow’s BOJ policy decision and Thursday’s ECB decision. For now, the dollar can cope with the political uncertainty. Of course, this won’t last eternally.
Sterling remained well bid, as was the case at the end of last week. We didn’t see any high profile news on data or on Brexit. The market is becoming positioned quite long sterling, but for now there is no clear trigger to change course. Dollar softness supports cable. The technical picture of EUR/GBP suggests some additional room to the downside if the 0.8810/00 intermediate support area would be broken. EUR/GBP currently tests the 0.8800 area. Tomorrow, the UK CBI retail data will be published.
European stock markets eke out small gains with the Spanish IBEX 35 outperforming (+1%), supported by Fitch’s upbeat assessment and rating upgrade. US stock markets opened little changed with Dow slightly underperforming.
News Headlines:
Germany’s SPD demanded concessions on immigration and healthcare from Chancellor Merkel’s conservatives in looming coalition talks that the centre-left party voted for at the weekend. Full talks between Merkel, SPD leader Martin Schulz and the leader of Merkel’s CSU Bavarian allies, Horst Seehofer may start as early as Tuesday.
The British government believes the question of whether it alone can stop Brexit is irrelevant, since it does not intend to change its mind about leaving the EU, according to its response to a legal challenge by Scottish lawmakers opposed to Brexit.
The IMF upgraded the outlook for the world economy, noting surprisingly strong growth in Europe and Asia and predicting that US tax cuts will give the American economy a short-term boost. Global growth is assumed to have expanded 3.7% for 2017 and to accelerate to 3.9% for this year and 2019.
The Czech National Bank is quite likely to raise interest rates at its next policy meeting on Feb. 1 and is not nervous about the crown, Governor Rusnok was quoted as saying.
