Markets
The global core bond sell-off paused today, but there are no real signs of a comeback to challenge broken resistance levels in yield terms. German Bunds outperform US Treasuries. Core bond gains are limited given the downward correction on European equity markets, rumoured end-of-month extension buying and lower-than-forecast German CPI inflation (1.4% Y/Y vs 1.6% Y/Y). EMU eco data remained strong. Some investors remained sidelined ahead of president Trump’s "State of the Union" (tonight) and the Fed meeting (tomorrow). Risks are that Trump advocates his America First policy more strongly than he did in Davos and that the Fed upgrades its economic/inflation assessment. Both factors are negative for US Treasuries. Changes on the German yield curve range between -1.3 bps (5-yr) and +0.4 bps (30-yr). The US yield curve bear steepens with yields 0.6 bps (2-yr) to 1.7 bps (30-yr) higher. 10-yr yield spread changes vs Germany are limited.
There were on follow-through gains on the USD rebound that started at the end of last week. This morning, the risk-off correction pushed USD/JPY, EUR/JPY and EUR/USD temporary lower but this classic risk-off trade evaporated soon. EUR/USD tested yesterday’s low just below 1.2340. The test was rejected, triggering a new intraday short squeeze in the euro. The EMU eco data were mixed. Q4 GDP was strong as expected. German inflation was softer than expected. However, the data were of little importance for FX trading. Interest rate differentials also didn’t provide guidance hovering near recent levels. USD caution prevails ahead of president Trump’s ‘State of the Union’ tonight and the Fed policy statement tomorrow. The risk-off sentiment slightly favours the yen but the decline of USD/JPY (currently 108.50) develops in a very gradual way. The euro remains the ‘by defaut’ preferred choice as long as caution persists due to upcoming (US) event risk. EUR/USD trades in the 1.2440 area.
Sterling was in the defensive this morning. Negative headlines on the impact of Brexit and a new flaring up of political bickering inside the UK government weighed on the UK currency. EUR/GBP filled offers in the 0.8830 area, but selling gradually eased. UK monetary data were mixed. Mortgage approvals declined more than expected but had no negative impact on sterling. Cable rebounded as the dollar came again under pressure (currently 1.4130 area). EUR/GBP settles near 0.88. BoE governor Carney speaks before the economic affairs committee at CET 16.30.
European equities decline up 1% as investors ponder the potential impact from the recent rise in yields. US equities also continue yesterday’s correction opening with losses of 0.75%/1.0%. Brent oil eases further to $69 p/b
News Headlines
The EMU economy expanded at its fastest rate in a decade in 2017 (0.6% Q/Q, 2.7% Y/Y) and EC EMU sentiment remained high at the start of 2018 despite a slight dip from a 17-year peak (114.7 from 115.3), signaling a strong start to the year. The 1y-ahead inflation expectations component within consumer confidence hit the highest level since February 2013. German inflation unexpectedly slowed for a second month in January (-1% M/M & 1.4% Y/Y), highlighting the challenge the ECB faces as it gauges when it can start unwinding stimulus..
Britain’s economy will be worse off after Brexit whether it leaves the EU with a free trade deal, single market access, or with no deal at all, according to leaked analysis that fed the view that the government is badly prepared.
Germany’s would-be coalition parties have reached a compromise on the divisive question of family reunions for migrants, both sides involved in the negotiations said, clearing a major hurdle in talks on a ruling partnership.
