Morning Markets Brief 12-20-2019

Summary and Price Action Rundown

Global risk assets are continuing this week’s gentle ascent in quiet pre-holiday trading this morning, while upward movements in sovereign yields are extending as investors await key US data and ponder the likelihood of a global economic rebound in 2020. S&P 500 futures point to a flat open, which would hold the index at yesterday’s record peak with year-to-date gains of nearly 28%. Equities in Asia and the EU were mixed overnight. With US-China trade on the backburner for now, major central banks largely on hold, and global economic data showing selective improvement, investors are expecting placid markets into year-end (more below). An uptrend in sovereign yields has been one area of clear directionality in markets this week, with the 10-year Treasury yield breaking above its multi-month range at 1.94%. With EU, Japanese, and other sovereign yields moving up in tandem, the dollar is finding little support from the rising rates, while the pound has stabilized after being impacted by reemergent concerns over Brexit and dismal growth data this week. Oil prices are dipping below six-month highs.

                 Sovereign Yields Edge to Multi-Month Highs Ahead of US Data

Ahead of today’s US growth and inflation figures, expectations of a 2020 global economic recovery, alongside highly accommodative policy settings by major central banks, are continuing to support longer-dated sovereign yields near their highest levels since mid-year. Yields on 10-year bonds in the US, Germany, the UK, and Japan are all continuing higher today, although the uptrend paused yesterday following a set of soft US economic figures. Specifically, US existing home sales fell 1.7% month-on-month (m/m) in November to a seasonally-adjusted annual rate of 5.35 million units in November of 2019, widely missing market expectations of a 0.2% drop, as a shortage of properties for sale is negatively effecting the real estate market. Initial unemployment claims were also disappointing, with 234K claims filed in the week ending on December 14th, compared with expectations of 225K. Additionally, the Philadelphia Fed Manufacturing index dropped by 10.1 points from the previous month to 0.3 in December, its lowest reading since June and well below the forecast of 8.0. US and global economic data earlier in the week, however, had generally been encouraging (with dismal readings from the UK the notable exception) and had helped spur sovereign yields higher. Later this morning, readings of US personal spending and income data for November, as well as core personal consumption expenditure prices (core PCE), the Fed’s preferred measure of inflation, could spur Treasury yields even higher. For context, the 10-year Treasury yield is at 1.94% and has not traded above 2.00% since late July after posting its 2019 high of 2.78% back in January.

 Markets Unmoved by Trade News

Although the ebbs and flows of US trade policy, particularly in relation to China, were a primary market catalyst throughout 2019, trade developments are a backburner issue for investors now that a US-China Phase One deal is complete. News this morning that President Xi is skipping the World Economic Forum in late January has doused hopes that Davos would be the venue for a trade deal signing summit with President Trump. Nevertheless, markets are exhibiting no reaction as investors mostly view the timing of finalization as a formality. Treasury Secretary Mnuchin indicated yesterday that the text of the deal is undergoing final legal review on both sides and will be disclosed to the public and signed in early January. Although there continues to be speculation among analysts over the feasibility of China’s purported US agricultural purchase commitments, investors are generally eager to move beyond this issue and are not expecting Phase Two deal talks to produce anything close to the drama and risks associated with this year’s brinksmanship negotiation tactics. Also, investors noted that the House of Representatives passed the US-Mexico-Canada (USMCA) trade agreement yesterday afternoon, as was widely expected, eliciting no discernable asset price reaction.

          Additional Themes

Markets Look Past US Political Drama – President Trump’s impeachment by the House of Representatives on Wednesday is still having no discernable impact on financial markets, despite reports that the Senate trial may be delayed by House Democrats. Analysts remain focused on the President’s continued support in the Senate. Investors are also parsing the latest Democratic debate, but no asset price reaction is evident.

 Bank of England Succession – Andrew Bailey has been announced as the successor to Governor Mark Carney when his term concludes at the end of January. Analysts consider this a choice for continuity of policy and futures markets reflect scant change in the policy outlook for next year, with roughly 50/50 odds of rate cut before year end. Meanwhile, the pound is steady this morning after extending its week-to-date losses versus the dollar to 2.4% yesterday following another disappointing economic reading, with headline retail sales for November significantly undershooting expectations, printing 1.0% year-on-year versus a forecast of 2.1%.