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    Weekly fixed income review: December

    December 20, 2019 Fixed income
    Week to December 20, 2019
    • US Treasury yields rose as risk sentiment improved on hopes of progress on a US-China trade deal. Both countries indicated they were close to signing the first phase of a deal, with US Trade Representative Robert Lighthizer indicating he expected the US to “nearly double” exports to China in the next two years. Moves to impeach President Trump appeared to have little impact on markets. The 10-year US Treasury yield rose by 12bp, while the spread between 2-year and 10-year yields widened to 30bp.
    • In Europe, markets focused on Italy and the UK. The brief period of stability in Italian politics appears to have come to an end, causing spreads to widen over the week. Constitutional reforms, championed by the Five Star Movement and approved in October, are now to be put to a referendum. This raises the risk that the government could collapse as the reforms were a condition for the Democratic Party (PD) to enter into coalition with Five Star. In the UK, the new government received a boost from credit rating agencies: S&P returned the UK to a stable outlook from negative, citing reduced risk of a no-deal Brexit; Fitch took the UK off negative watch, although they kept a negative outlook. Overall this led to an outperformance of UK gilts and an underperformance of Italian government bonds.
    • Sweden ends negative rates. Contrary to the global easing cycle, Sweden raised interest rates from -0.25% to zero on the expectation that inflation will remain close to target in the coming years.
    • In US and European credit, corporate spreads tightened, driven by a lack of supply and a boost to sentiment from the news on a possible US-China trade deal. We expect no further deals this year, and demand was buoyed by buying from Asia.

    Chart of the Week: European bond markets were mixed, with UK outperformance and Italian underperformance

    Chart of the Week-European bond markets were mixed, with UK outperformance and Italian underperformance 

    Source: Bloomberg and US Bureau of Labor Statistics. Data as at December 20, 2019.

    US Bloomberg statistics_20_Dec_2019

    Source: Bloomberg, December 20, 2019

    Economic calendar

    23 December: Canada GDP, US new home sales
    24 December: Japan core CPI, US durable goods
    25 December: Holiday
    26 December: Holiday
    27 December: Japan retail sales, Chinese industrial profits, ECB economic bulletin

    Week to December 13, 2019
    • The final Federal Reserve (Fed) meeting of 2019 brought a run of three consecutive rate cuts to an end. The Fed’s messaging even tilted slightly towards the optimistic side, removing any mention of “uncertainties” to the outlook, partly as the trade conflict with China appears closer to stabilizing. According to the committee’s refreshed ‘dot plot’, a large majority comprising 13 of its 17 members expect no change in rates by the end of 2020. While this may be no great surprise, it is interesting to note that that no member predicts a cut.
    • Boris Johnson’s Conservative party secured a sweeping victory in the UK general election, achieving their biggest majority since 1987 and gaining many seats in traditional Labour heartlands. Labour leader Jeremy Corbyn described his party’s defeat as “disappointing” and announced that he would not be contesting another election as Labour leader. In one of the night’s big upsets, Liberal Democrat leader Jo Swinson lost her seat. The Scottish National Party also enjoyed a triumphant night with big gains. The pound gained more than 2% with the FTSE 100 making similar gains, while gilts sold off, reflecting the improvement in investor sentiment that the reduced uncertainty brings.
    • The US and China appear to be edging closer to a limited trade deal that may lead to a possible reduction in tariffs. Talks appeared to accelerate after the US offered to reverse a chunk of tariffs on Chinese goods – a key demand from Beijing – while offering to remove the threat of new tariffs on US$165bn of Chinese imports that were due to take effect on Sunday. China meanwhile has committed to large annual purchases of US agricultural produce and to make pledges on intellectual property rights.
    • Rising trade hopes saw US corporate spreads tighten by 3bp. There have been reports of overnight buying from Asia in overnight sessions, which has helped work down dealer balance sheets into yearend. New issuance has been muted given the Fed meeting, although we saw offerings from Steel Dynamics and Calpine. European credit markets have enjoyed positive momentum into yearend, with most segments of the market grinding tighter over the past week. Positive US-China trade headlines and ongoing monetary policy support continue to underpin markets.

    Chart of the Week: The pound surged following the Conservatives decisive victory in the UK General Election

    Chart of the Week- The pound surged following the Conservatives decisive victory in the UK General Election_13_dec_2019 

    Source: Bloomberg and US Bureau of Labor Statistics. Data as at December 13, 2019.

    Bloomberg_13_Dec_2019

    Source: Bloomberg, December 13, 2019

    Economic calendar

    • December 16: Eurozone PMIs
    • December 17: UK unemployment
    • December 18: UK CPI
    • December 19: Bank of England rate decision
    • December 20: People’s Bank of China rate decision
    Week to December 6, 2019
    • European government bonds broadly moved higher with German bunds enduring a volatile week. The yield on 10-year German bunds began the week nearly 8bp higher after the election of new leadership of the Social Democratic Party (SPD). Analysts suspect that new SPD co-leaders Norbert Walter-Borjans and Saskia Esken could threaten the SPD’s position in the Germany’s coalition government. However, yields then reacted to the see-sawing US-China trade headlines, with the 10-year yield falling 10bp to -0.36% on Tuesday before climbing back up to -0.29%. 
    • It was a quiet week for European credit markets as spreads tightened 2bp and total primary new issuance ended slightly above €10bn. With no new announcements this week, this could be the final week of meaningful issuance activity before the new year.
    • US Treasury yields ended the week modestly higher as US-China trade updates dominated news headlines. The yield on 10-year Treasuries dropped nearly 14bp on Tuesday due to reports that the US was still moving forward with the 15 December trade tariffs and that a trade deal may not happen until after the US election. However, sovereign bonds sold off on improved trade rhetoric to end the week 8bp higher. In economic data releases, the US economy added 266,000 jobs in November and unemployment fell to 3.5%, the lowest reading in 40 years (see chart below).
    • US corporate spreads were largely unchanged on the back of conflicting trade headlines and the expectation that the 15 December tariffs will be delayed. Risk markets held up relatively well when there were concerning trade headlines, suggesting declining market sensitivity to trade as confidence about the economic outlook improves. New issuance was minimal but there were offers from Twitter, Charter, American Electric Power Company, Cameron LNG and Ford.
    • In emerging markets, President Trump announced plans to place steel tariffs on Brazil and Argentina after accusing both countries of devaluing their currencies. The Brazilian real fell 0.5% while the Argentine peso was largely unchanged after the announcement

    Chart of the Week: US unemployment hots 40-year low (%)

     

    Source: Bloomberg and US Bureau of Labor Statistics. Data as at December 6, 2019.

    Source: Bloomberg, December 6, 2019

    Economic calendar

    • Monday: Consumer inflation expectations (US)
    • Tuesday: GDP (UK), Zew survey (Germany)
    • Wednesday: Inflation (US), Federal Reserve policy decision (US)
    • Thursday: Inflation (Germany), European Central Bank policy decision (EU), Jobless claims (US)
    • Friday: Retail sales (US)
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