Markets
Global core bonds corrected higher today with US Treasuries outperforming German Bunds. The move is mainly technically inspired. The newly approved short term funding bill triggered a test of key resistance levels in US yields (eg 2.42% for 5-yr and 2.63%/2.64% for 10-yr), but a sustained break didn’t occur and caused some return action. German Bunds had a small upward bias as well with markets taking into account that the ECB probably won’t change its communication policy already at Thursday’s meeting. A very strong German ZEW-indicator (both current situation and expectations) couldn’t change that. The German curve flattens at the time of writing with yield changes ranging between +0.1 bp (2-yr) and -1.9 bps (30-yr). From a technical point of view, the German 10-yr yield remains in the narrow 0.50%-0.60% channel. The US yield curve drops 1.2 bps (2-yr) to 3.1 bps (10-yr) lower. 10-yr yield spread changes versus Germany range between +1 bp (Ireland) and -2 bps (Portugal/Italy/Spain). Greece outperforms (-5 bps). Markets digested huge new supply quite well. The Kingdom of Spain raised €10bn with a new 10-yr bond (Apr2028) at MS +46 bps. Order books exceeded €45bn. Friday’s rating upgrade by Fitch to A- (stable outlook) couldn’t have come on a better time.
The price action in EUR/USD was similar to yesterday. EUR/USD hovered in the 1.22 big figure. Both the US government shutdown and its solution were no big issue for FX trading. German ZEW economic sentiment was very strong, but had little impact on the euro. EUR/USD trades is in the 1.2260 area, little changed from the start in Europe. Market statistics suggest that investors are positioned long euro ahead of the ECB meeting. For now, there is no trigger to change this positioning in a profound way. USD/JPY faced some intraday repositioning after the BOJ’s policy meeting. Initially, it seemed that soft speak of BOJ Kuroda would push USD/JPY north of 111. However, an easing of global risk sentiment later in the session,and an overall softer dollar pushed USD/JPY back lower in the 110 big figure. Both EUR/USD and USD/JPY hold within the established ranges, but the overall picture of the dollar looks fragile. Especially USD/JPY and the trade-weighted dollar fail to move away from ST support levels.
Over the previous days, sterling was in good shape even as there was little hard news to support the move. The sterling rebound ran into resistance today. UK eco data were not to blame. The UK December budget deficit was small. CBI order data suggest a constructive momentum in the manufacturing sector and rising pricing power. However, it didn’t help any further sterling gains. EUR/GBP regained a few ticks, but holds below the 0.88 mark (currently 0.8775 area). Cable trades slightly off the 1.40+ peak despite overall USD softness.
European equities show modest gains (0.25%-0.50%) as momentum eased after a strong start. US indices open little changed as the earning season gears up. Is time ripe for the impressive 2018 rally to shift into a lower gear?
News Headlines
British manufacturing grew strongly in January, helped by export demand. At the same time, the proportion of factories expecting to raise prices hit a 34-yr high, a CBI survey showed. The CBI order book balance eased to +14 from a peak of +17 in December. The CBI’s prices balance rose to +40 from +23, its highest since January 1984.
German ZEW investor sentiment improved further in January, ignoring the political stalemate in the formation of a new government. ZEW economic sentiment rose to 20.4 from 17.4. The index measuring investors’ assessment of the economy’s current conditions rose to 95.2 from 89.3, the highest level since the survey began in 1991.
Brazil’s inflation returned within the official targeted range for the first time in six months. Consumer prices tracked by the benchmark IPCA index rose 3.02% Y/Y in January, according to state statistics agency IBGE.
