Morning comment: A softer market mood

Chris Scicluna
Emily Nicol
Mantas Vanagas

Overview:
With US markets unable to provide a steer, and little major news from the region to change the mood either, Asian markets today seemed to take their cue from yesterday’s downbeat showing in Europe with the major equity indices in retreat across the region. The negative tone tallied with yesterday’s revisions by the IMF to its global economic forecasts – and while the Fund cut by 0.2ppt its forecast for global GDP growth this year to 3.5%, which would be the lowest in 3 years, we think its forecasts for the euro area and UK of 1.6% and 1.5% respectively are still about ½ppt too strong. In the absence of significant local economic news, China’s CSI300 dropped 1.3% while CNY depreciated for a fourth successive day to move through 6.80/$. In contrast, the weaker risk appetite saw the yen appreciate, to similarly weigh on Japanese equities, with the TOPIX closing down 0.6%. But losses in Korea were more modest at 0.3%, supported modestly by a better-than-expected Q4 GDP report, with government spending providing a boost to deliver growth of 1.0%Q/Q and 3.1%Y/Y, the strongest annual rate in 2½ years.

Tallying with the broader downbeat tone, in the bond markets USTs made gains upon reopening (10Y yields now back below 2.75%) while yields on 10Y JGBs fell back to zero percent as the BoJ’s latest two-day policy meeting got underway. Euro area govvies (with the exception of BTPs) are also firmer at the open. Futures markets point to further equity market declines in Europe and the US today on a day where the most notable new economic data come from the UK in the shape of the latest labour market report. Brexit noise will continue to dominate sterling and Gilts, however, with reports that one Cabinet Minister – the remainer Amber Rudd – has warned Theresa May that dozens of ministers could resign if they are not able to vote next week in favour of draft legislation seeking an extension of the Article 50 deadline. Certainly, an extension of the Article 50 deadline beyond end-March, to avoid a no-deal Brexit, remains our baseline scenario for now.

Euro area:
Tuesday will be another low-key day for economic data from the euro area, with only a couple of surveys to offer mild distraction. The German ZEW survey seems likely to suggest that investors judge that current and expected future economic conditions have deteriorated again this month, the former to the least favourable in four years. In addition, the ECB will publish its latest bank lending survey, which, among other things, will give a guide to the strength of loan demand and the impact of last year’s widening of BTP spreads on Italian lending conditions. Meanwhile, German Chancellor Merkel and French President Macron will meet in Aachen to sign a new treaty strengthening co-operation between the leaders’ two countries 

UK:
Today brings the most noteworthy UK data release of the week in the form of the latest labour market figures. Most headline numbers are set to be little changed from the previous month. Indeed, the three-month rate of employment growth is expected to have remained close to 80k3M/3M in November, very similar to October and improved from the soft reading of -5k3M/3M in August. The headline unemployment rate is also likely to have moved sideways at 4.1%. We also expect headline growth in average weekly earnings to be little changed from October’s reading of 3.3%3M/Y, which was the strongest rate since the 2008 crisis.

US:
In the US, today will bring just existing home sales data for December, which, following an improved showing the prior month, are expected to decline again back close to the bottom of the range of the past three years.

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