Risk Sentiment Remains In The Driving Seat To Guide Market Action

Markets

Both core bonds and stocks started celebrated the first trading day of the year with a strong start. However, only bonds made it to the finish line as the traditional risk correlation re-established itself throughout dealings. European stocks managed a small positive close while US stocks eventually lost around 1.5%. Investors eye worrying Covid-developments and today’s Senate runoff elections in the state of Georgia which could balance the seats in US Senate, hand vice-president Harris the tie-breaking vote and complete the Democratic blue election sweep. Such Democratic dominance now has a negative (risk) connotation though with markets fearing higher taxes and more regulation. Yesterday’s deteriorating risk sentiment dynamics added to core bonds’ momentum and helped the dollar off its weakest intraday levels. The German yield curve bull flattened with yields sliding 1.2 bps (2-yr) to 3.6 bps (30-yr). Changes on the US yield curve varied between -1.3 bps (7-yr) and +1.1 bp (30-yr). Intra-EMU 10-yr yield spread changes vs Germany widened by up to 4 bps (Italy). The trade-weighted dollar reached a fresh sell-off low at 89.42 before returning to the high 89 area. EUR/USD tested the 1.23 big figure but closed at 1.2248. Sterling underperformed other majors. Apart from risk aversion, it turned clear that UK PM Johnson would tighten lockdown measures which he eventually did by ordering a national shutdown until mid-February. EUR/GBP closed at 0.9025 compared to an 0.8957 open.

Asian stock markets trade mixed this morning with China (see headlines) and South Korea outperforming. The Chinese yuan initially continued yesterday’s rally which pulled USD/CNY below 6.50 for the first time since June 2018 before stabilizing near 6.45. Core bonds hold on to yesterday’s advance while the dollar remains in the soft spot. Brent crude fell from an intraday high of more than $53/b to below $51/b this morning as OPEC+ talks unexpectedly went into extra time. Russia proposed another supply hike in February which is opposed by Saudi Arabia and most of its allies. The supply discussions come as demand is again pressured by the tougher global lockdown measures. The Covid-19 story is ambiguous right now with the slow vaccination start overshadowed by rising infections/deaths. Today’s eco calendar contains the US December manufacturing ISM with consensus forecasting a small setback from a high level (56.7 from 57.5). We don’t expect such outcome to influence trading. Fed speeches (Evans, Williams) and the Georgia election are wildcards. Overall, risk sentiment remains in the driving seat to guide market action. An extension of yesterday’s (US) stock market correction would further underpin demands for core bonds while it could simultaneously lend some support to the ailing dollar.

News Headlines

The New York Stock Exchange backtracked on earlier plans to delist China’s three biggest state-owned telecommunications companies. The move came just four days after the exchange said it would remove the shares in order to comply with a US executive order that prohibits investing in businesses owned or controlled by the Chinese military, citing nothing more than “consultation with the relevant regulatory authorities”.

The City of London saw some €6bn of share dealing shifted to facilities in European capitals on the first trading day in the post-Brexit era, FT reported based on Refinitiv data. The volume amounted to about a sixth of all equity business on European exchanges on Monday.

Italy extended some Covid-19 restrictions imposed during the holidays through mid-January in order to counter a flare-up of the virus as the vaccination roll out is taking longer than expected. Elsewhere in Europe, Germany, Greece and Austria also extended its containment measures or postpone easing measures. Ireland and France may follow suit.