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Rates: Will Bunds continue to decline as ECB meets?
Core bonds are moving lower on the uptick in risk sentiment with the US and China showing progress in trade talks. Investor focus shifts to the ECB meeting of today. With markets already positioned on the dovish side, we expect a balanced message from Draghi given probable GDP/CPI forecast downgrades.

Currencies: ECB meeting probably won't be a game-changer for euro trading
There was again no news topic important enough to give clear directional guidance for trading yesterday in the major FX cross rates. Today, the ECB will take center stage. Draghi might keep a cautiously positive tone, but is unlike to trigger a euro rally. Sterling rebounded as PM survived a confidence vote, but hurdles for further GBP gains remain high.

The Sunrise Headlines

• US equities ended in green on upbeat trade expectations. Nasdaq (+0.95%) outperformed. Asian stock markets are surfing along the green wave. China (+1.5%) outperforms.
• Shipments of US soybeans are heading for China following the country's first significant purchase since both countries began imposing tariffs. The move is regarded an important gesture of China toward easing tensions.
• Theresa May survived a vote of no confidence triggered by her Conservative Party last night. She received backing of 200 party members, 117 opposed her. May cannot face another Tory triggered vote for at least a year.
• The Brazilian central bank left its benchmark rate unchanged at 6.5% saying the domestic economy is gradually recovering but the global outlook remains challenging. CPI is at “comfortable levels” despite the recent sell-off of the real.
• China detained Canadian businessman Michael Spavor on suspicion of harming the country's state security. The announcement follows the detention on Monday of Canada's Michael Kovrig on the same grounds, a move considered reprisal for the arrest of Huawei's CFO Meng Wanzhou.
• EU's economy commissioner Pierre Moscovici said it's wrong to compare France with Italy following the former's recent expansion of the deficit. Exceeding the 3% limit is allowed in a “limited, temporary, exceptional way” and cannot last 2 consecutive years. France's deficit in 2017 amounted to 2.8%.
• Today's a heyday for central bank watchers as the Swiss National Bank, Norges Bank and the ECB hold their December meeting. Also watch for statements from the European Council concerning Italy and Brexit. The US, Italy and Spain tap the bond market

Currencies: ECB Meeting Probably Won't Be A Game-Changer For Euro Trading

ECB meeting unlikely to be a FX gamechanger

The EUR/USD trading pattern yesterday was similar to what happened of late. The news headlines caused some moderate intraday swings but wasn't able to push the pair out of the established ranges. Early euro softness reversed on headlines that Italy might agree a 2% 2019 budget deficit. Easing tensions in the trade talks between the US and China and a positive risk sentiment were rather neutral for EUR/USD trading. US CPI data were exactly in line with expectations. The euro was also little affected by the Brexit saga (drama) as it developed in the UK yesterday afternoon. EUR/USD closed a rather dull session at 1.1369 (from 1.1317). Trading in the USD/JPY cross rate was even less inspiring. A riskon sentiment and higher US yields failed to inspire any further USD/JPY gains. The pair finished at 113.29 (from 113.38). Overnight, Asian equities join the risk rebound from the US yesterday. The dollar shows no clear directional bias. The yuan continues a cautious rebound (USD/CNY 6.8650). EUR/USD trades little changed (1.1370). USD/JPY gains a few ticks (113.45). US data (import prices and claims) later today are second tier. The focus will be on the ECB meeting. Chairman Draghi has to walk a thin line. He will probably admit risks to growth, but the new ECB-forecasts will stay strong enough for Draghi to conclude that inflation will move closer to target at the end of the policy horizon. Question is whether the market will believe this rather positive scenario. The ECB communication might help to put a floor for European yields. This is a tentative euro positive, but we don't expect today's meeting to be a game-changer for EUR/USD. The focus will soon turn to next week's Fed meeting. Of late, the 1.1450/1.15 area proved to be a though resistance. We don't see a trigger for a break ST.

Sterling trading was at the mercy of the headlines on the leadership vote within the Conservative party yesterday. Sterling started the session on a weak footing, but rebounded intraday as markets saw a good chance of PM May surviving. This is exactly what happened. Even so, sterling couldn't maintain gains below the EUR/GBP 0.90 level. PM May will try to get new concessions from EU leaders at a summit today. However, it is unlikely that this process will yield many GBP-supportive headlines. So yesterday's sterling rebound might be short-lived.

EUR/USD: holding in well-known territory going into ECB meeting

The Swiss National Bank (SNB) is maintaining its expansionary monetary policy, thereby stabilising price developments and supporting economic activity. Interest on sight deposits at the SNB remains at –0.75% and the target range for the three-month Libor is unchanged at between –1.25% and –0.25%. The SNB will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration.

Since the monetary policy assessment of September 2018, the Swiss franc has depreciated slightly on a trade-weighted basis. This development is primarily due to the strengthening of the US dollar. The franc is virtually unchanged against the euro. Overall, the Swiss franc is still highly valued, and the situation on the foreign exchange market continues to be fragile. The negative interest rate and the SNB's willingness to intervene in the foreign exchange market as necessary remain essential. These measures keep the attractiveness of Swiss franc investments low and reduce upward pressure on the currency.

The new conditional inflation forecast for the coming quarters is lower than it was in September. This is mainly due to the drop in oil prices. The medium-term inflation forecast is also slightly lower owing to more moderate growth prospects. For the current year, the SNB continues to anticipate inflation of 0.9%. The forecast for 2019 has been revised down from 0.8% to 0.5%. For 2020, the SNB expects inflation of 1.0%, compared with its previous forecast of 1.2%. The conditional inflation forecast is based on the assumption that the three-month Libor remains at –0.75% over the entire forecast horizon.

Global growth lost momentum somewhat in the third quarter. However, this was largely attributable to special factors in the euro area and Japan. Economic expansion in the US and China remained robust. Employment figures in the advanced economies rose again and unemployment continued to decline. The growth in international trade in goods also continued.

In its baseline scenario for global economic developments, the SNB anticipates solid growth in the coming quarters. In the short term, the world economy is set to continue to expand somewhat above potential, benefiting from the clear improvement in the labour market situation and the ongoing expansionary monetary policy in the advanced economies. However, a gradual slowdown is likely in the medium term.

Nevertheless, there are significant risks to this positive baseline scenario, primarily in connection with political uncertainties and protectionist tendencies. These factors have had an increasingly negative effect on both business and financial market sentiment in recent months. Stronger turbulence could jeopardise global economic growth and have an impact on monetary policy.

In Switzerland, GDP fell by an annualised rate of 0.9%. Despite this decline, GDP was still 2.4% higher year-on-year thanks to the strong expansion in the previous quarters. A slowdown in GDP momentum was to be expected after several very strong quarters. Furthermore, the decline in GDP is also attributable to temporary factors. An analysis of all the available economic indicators points to momentum weakening slightly but remaining positive. The favourable development on the labour market also continued. Employment increased strongly in the third quarter. The unemployment rate declined again through to November to stand at 2.4%.

The SNB now anticipates slightly lower GDP growth of around 2.5% for 2018 as a whole. As in other countries, economic momentum in Switzerland is likely to weaken somewhat in 2019. The SNB expects a rise of around 1.5% in GDP for the coming year.

Risks are to the downside, as is the case with the global economy. In particular, a sharp slowdown internationally would quickly spread to Switzerland.

Imbalances on the mortgage and real estate markets persist. Both mortgage lending and prices for single-family homes and privately owned apartments continued to rise at a moderate rate over recent quarters. Although prices in the residential investment property segment have stabilised, there is the particular risk of a correction due to strong price increases in recent years and growing vacancy rates. The SNB will continue to monitor developments on the mortgage and real estate markets closely, and will regularly reassess the need for an adjustment of the countercyclical capital buffer.

XAUUSD (1244.77): Gold prices have turned flat following the strong rally to 1248 region. The support at 1242.25 is seen holding up for the moment. This could potentially keep the bias balanced as gold prices could be seen breaking out higher above 1248.00. To the downside, a clear break of the support is needed for gold prices to retest the support area of 1227.10.

GBPUSD (1.2616): The GBPUSD currency managed to lift off the intraday lows and closed higher, just below the recently breached support level of 1.2683. The reversal in the sterling came after the UK's no-confidence vote saw PM May winning the vote. However, with Brexit still significant uncertainty, the GBPUSD could potentially remain subdued below the price level. We expect a possible retest of 1.2683 for the price level to be tested as resistance.

EURUSD (1.1365): The EURUSD currency pair was trading somewhat subdued after briefly attempting to rally during the day. Price action was seen once again testing the falling trend line, and the 4-hour session posted a reversal. We expect the euro to remain weak into the ECB's meeting but expect a possible rebound off the support level near 1.1315 - 1.1300 region. Failure to hold the declines could potentially risk pushing the EURUSD lower to test the previous lows at 1.1200 level. To the upside, the resistance at 1.14350 needs to be cleared for any signs of a breakout to the upside.

Brexit hogged the limelight on Wednesday as British PM May faced a vote of no-confidence. Although there was a surprise in the decision, this was widely speculated. The sterling initially slipped on the news only to recover strongly later towards the evening.

The outcome of the no-confidence vote was that the PM May managed to hold her ground with 200 votes in her favor and 117 against her. However, uncertainties remain on the final Brexit deal which is yet to be approved by the UK parliament.

Industrial production in the Eurozone rose 0.2% matching estimates. This followed a revised 0.6% decline from the month before. The U.S. headline inflation was flat for November, as per estimates. This followed a 0.3% increase the month back. The core inflation rate was also up 0.2% as per estimates, and the increase was the same pace as seen in the previous month.

Investors look to a busy day in the markets amid a line up of central bank meetings. The day starts with the final inflation figures from Germany and France. Consumer prices in Germany are forecast to rise 0.1% on the month while French CPI is expected to fall 0.2%.

The Swiss national bank will be holding its monetary policy meeting today. No changes are expected as the labor rate is forecast to remain unchanged at -075%. This SNB's meeting is followed by the European central bank's monetary policy meeting.

The ECB is all set to announce an end to its QE program at today's meeting. However, there could be a cautious tone to the ECB's forward guidance. President Mario Draghi will be speaking later in the day.

The NY trading session will see the U.S. import price data. Import prices are forecast to fall 1.0% in November.

Sterling was volatile in overnight trading after Theresa May won a vote of confidence in Westminster. After the vote, sterling rose sharply but the gains could not be sustained. After reaching a high of 1.2670, the GBP/USD pair then dropped to a low of 1.2590. This is because the vote left a party deeply divided. As May heads to Brussels, she will likely be thinking about how to balance the interests of pro-Brexit Tories with those of pro-European Tories. This is because she will need each of their votes considering that the Labor party will be unlikely to support her plan.

The price of crude oil declined sharply after inventory data from the EIA yesterday. In the Asian session, the price moved up slightly. Numbers showed that in the past week, inventories had reduced by 1.2 million barrels. This was a lower reduction than investors were expecting. Investors were expecting the drawdown to be more than 2.99 million barrels. Earlier on, the American Petroleum Institute (API) had released numbers that showed an inventory drawdown of more than 10 million barrels.

The Swiss Franc declined against the USD in overnight trading as traders waited for the decision by the Swiss National Bank. The interest rates decision will be made in the morning hours of the trading day. While the bank is not expected to raise or lower interest rates, traders will be looking at their statement for direction. In previous meetings, the bank has been careful about not changing the monetary policy. This is because such a move would likely lead to a stronger Franc. The bank favors a weaker currency to help improve the exporting industry.

EUR/USD

The EUR/USD pair moved up after Theresa May’s confidence vote. It reached an intraday high of 1.1386. The hourly chart below shows that the pair has been making large intraday swings. This has made the pair lack an upward or downward trend. The current price is slightly above the 25-day and 50-day EMA. This sideways direction could be changed today after the ECB decision.

GBP/USD

The GBP/USD pair moved up in overnight trading but found resistance at the 1.2670 level. With May still in power, traders will focus on whether she can get an acceptable deal before the vote in parliament. It is now trading at the 1.2613 level. This price is slightly above the 50-day and 25-day EMA. After rising sharply, the Chaikin oscillator has moved lower to the neutral level. The same is true with the Relative Vigor Index (RVI). In the short term, the pair could continue going down as traders price-in the probability of a no-Brexit deal. If it does, it will continue moving to yesterday’s low of 1.2500.

XTI/USD

The XTI/USD pair continued to make big swings in overnight trading. The pair reached an intraday low of 51 and then started moving up. On the hourly chart, the price is between the lower and middle band of the Bollinger Bands. However, the pair’s recent swings are evident as shown in the hourly chart below. After getting to the oversold level, the pair’s RSI has moved up a bit to just below 40. XTI/USD will likely continue being volatile as traders continue to think about the demand for 2019.

This year has been tough for cryptocurrencies. Their market value has declined from more than $850 billion to less than $110 billion with leading cryptos such as Bitcoin suffering huge price drops.

As negative sentiment runs wild and more investors continue to dump their holdings, it is difficult to see a bright side. However, the current crash could be what is needed for the cryptocurrency industry to be successful, especially as the industry is still relatively new and volatility is to be somewhat expected.

In the late 90s, the dot-com bubble occurred. Investors rushed to invest in anything ending with dot-com. This saw valuations of worthless companies reach billions of dollars. The same thing happened in the crypto industry. Investors rushed to invest in all ICOs, even those with questionable products. In the stock market, a number of companies changed their business models to include blockchain. A good example of this was Overstock, an e-commerce company that created a blockchain arm. This led to its valuation rising to more than $3 billion. Today, it is worth $613 million.

Therefore, the current crash could be a good thing for the blockchain industry. This is because, as the value of worthless IPOs plummets, there will be value in those that solve real problems. So, amidst all the darkness and pessimism, there is an upside to the current crash.

The BTC/USD pair reached a YTD low of 3196 last week. Since then, the price has moved to the current high of 3360. On the four-hour chart, the price is below the 25-day and 50-day EMA. The RSI is at 41, which is an indication of neutrality. As sentiment falls, there is a likelihood that the price will continue moving downwards.

General Trend:

• Property shares outperform in China and Hong Kong, add on to recent gains amid yuan strength
• Chinese steel makers track strength in metals prices, trade developments eyed
• Hong Kong listed UK-banks gain, PM May survived confidence vote
• Trade sensitive Marine/Transportation and Iron/Steel sectors gain in Japan; Softbank declines
• Australia’s telecom index drops over 3%; Competition regulator raised concerns about the TPG Telecom/Hutchison merger
• Chipmakers in South Korea lag the overall market
• NZ cuts growth and operating surplus forecasts, muted impact on the Kiwi
• China bond yields track Treasuries, gains in equity markets
• Diplomatic issues between China and Canada continue to linger with a second Canadian citizen being questioned and unreachable by authorities
• China said to be open to revisions to its ‘Made in China 2025’ plan
• China Commerce Ministry expected to hold weekly press conference later today
• Looking Ahead: China Nov data due for release on Friday (including industrial production), BoJ to release quarterly Tankan survey
• ECB and Philippines Central Bank expected to hold rate decisions on Thursday

Headlines/Economic Data

Japan

• Nikkei 225 opened +0.7%
• EU Parliament lawmakers approve start of Japan free trade agreement
• (JP) Japan Chief Cabinet Sec Suga: To closely watch UK developments after PM May confidence vote; no plans to ask companies to avoid certain devices
• (JP) Japan Nov Tokyo Avg office Vacancies y/y: 1.98% v 2.2% prior
• 6302.JP Silchester International raises stake to 8.15% (prior 7.08%)
• 7201.JP Said to be planning to repatriate $1.1B from China as it gathers cash amid tensions with Renault - press
• (JP) Japan MOF sells ¥2.0T v ¥2.0T indicated in 0.10% 5-yr JGB: avg yield: -0.1120% v -0.0870% prior, bid to cover: 3.84x v 3.89x prior

Korea

• Kospi opened +0.2%
• (KR) South Korea Nov Import Price Index M/M: -4.6% v 1.5% prior (fastest decline in ~4-yrs); Y/Y: 6.0% v 10.7% prior
• (KR) North Korea nuclear test site may not have been completely abandoned according to satellite images, buildings and roads remain intact - Yonhap citing report from US think tank 38 North

China/Hong Kong

• Hang Seng opened +0.9%, Shanghai Composite +0.2%
• (CN) China said to have purchased up to 2M tons of US soybeans - US financial press
• (CN) China PBoC Open Market Operation (OMO): Skips operation for the 35th straight session
• (CN) China PBoC sets yuan reference rate: 6.8769 v 6.9064 prior
• (CN) China FX Regulator SAFE official: Yuan to keep basically stable
• (CN) China Vice President Wang Qishan: Needs to be a stronger confidence and more concrete efforts to write a "new chapter" of reform and opening up in the new era – Xinhua
• (CN) Peking University professor Yan Se: Although external uncertainties are abound and downside risks have emerged, China's policy makers have many economic levers at hand to deal with challenges – Xinhua
• (HK) The plan related to the HK/China ETF Connect said to be canceled amid certain technical issues - HK Press
• (CN) China reportedly preparing to replace "Made in China 2025" plan; revised plan would downplay China's efforts to expand its manufacturing dominance
• (CN) China said now hold Central Economic Work Conference meeting Dec 19-21 (prior Dec 14th) - US financial press

Australia/New Zealand

• ASX 200 opened flat
• FMS.AU To delist from ASX, subject to shareholder approval
• TPM.AU ACCC expresses preliminary competition concerns about proposed merger with Vodafone Hutchison Australia
• (NZ) New Zealand Treasury issues Half-Year Economic and Fiscal Update: NZ$8.0B bond issuance unchanged until 2022, cut 2018/19 GDP growth forecast; lowers operating surplus forecasts
• (AU) Australia Dec Consumer Inflation Expectation: 4.0% v 3.6% prior

North America

• (CA) Canada Foreign Min Freeland: Another Canada citizen, Spavor, got in touch with Canadian authorities to say Chinese authorities were asking him questions and Canada has not been able to make contact with him since
• (CA) Follow Up: Canada businessman Michael Spavor is being investigated in China for suspicion of harming China's national security - Chinese Press
• ZTS Authorizes $2B share repurchase program (5% of market cap); Raises Quarterly dividend 30.2% to $0.164 from $0.126 (indicated yield 0.72%)
• UA Raises bottom end FY18 $0.21-0.22 v $0.22e (prior $0.19-0.22), gross margin flat (prior flat to down slightly); Initial FY19 $0.31-0.33 v $0.35e, rev +3-4%

Europe

• (UK) PM May: pleased to receive backing of colleagues in confidence vote - statement after confidence vote
• (UK) Brexiteers count 86 Tory members as voted that they have no confidence in PM May leadership (far short of number needed to oust May) - UK's Telegraph
• (UK) EU expected to reject UK PM May request at EU summit for legally binding assurances that the Irish backstop will only ever be temporary - UK press

Levels as of 12:50ET

• Hang Seng +1.0%; Shanghai Composite +1.3%; Kospi +0.8%; Nikkei225 +1.0%; ASX 200 +0.2%
• Equity Futures: S&P500 +0.3%; Nasdaq100 +0.5%, Dax +0.1%; FTSE100 +0.3%
• EUR 1.1364-1.1378; JPY 113.20-113.50 ; AUD 0.7212-0.7231; NZD 0.6843-0.6865
• Feb Gold -0.1% at $1,249/oz; Jan Crude Oil +0.1% at $51.27/brl; Feb Copper +0.9% at $2.79/lb

The EUR/USD could finally be ready for a new bullish ABC correction (blue) within wave Y (purple) if price manages to break above the resistance trend lines. In that case, a bullish break could see price move up towards the Fibonacci targets of Y vs W.

The EUR/USD has probably completed a bearish ABC zigzag (green) pattern when considering the strong bullish bounce.The current bullish impulse is probably a 12345 wave (green) as long as price stays above the 50% Fibonacci level of wave 4 vs 3.