Brexit negotiations enter the tunnel

Market movers today

Focus remains on vaccine news and Brexit negotiations. The latter is showing signs of progress as there are indications that the two sides are entering the so-called 'tunnel negotiations' where there is no communication with the press.

German retail is expected to have grown by almost 6% y/y in October, but this was before COVID-19 restrictions were put in place in earnest.

ECB's Lane and Fed's Powell will speak later today, shortly before both institutions head into the silent period ahead of their upcoming monetary policy meetings.

The 60 second overview

Macro: Brexit negotiations entering the tunnel? According to Tom Newton Dunn, political reporter from The Times, the EU and the UK have entered the so-called 'tunnel negotiations', meaning that the two sides have agreed to negotiate heavily in coming days without leaking to the press, briefing other officials etc., see Twitter. At the time of writing, Dunn is the only one reporting this but if it is true it is positive, as it is usually a sign that a deal is imminent. Our base case remains a deal and think one is likely ahead of the EU summit on Thursday next week.

US stimulus package. The matter of additional US stimuli is heavily discussed as some of the US fiscal support measures will run out later this month. House leader Pelosi, Senate majority leader McConnell and a bipartisan group all said they have new proposals. No size of Pelosi's proposal has been released, while McConnell's is said to be similar to the previous proposal of USD500bn. Notably, the bipartisan proposal is interesting given the size of USD908bn. The restart of the stimuli talks sent US yields higher.

US President-Elect Biden on trade deal. According to the NYT, Biden will not immediately remove phase 1 tariffs on China but will conduct a full review of the existing China trade deal first.

COVID-19. Pfizer and BioNTech officially sought approval for the European market yesterday making way into the roll-out of the vaccine in the EU.

Equities. Strong December start for equities with significant outperformance by cyclicals but also value outperforming growth the first day of December. We expect this picture to continue as we see manufacturing data continuing to outperform service and trade data surprising to the upside.

Asian equities are mostly higher this morning led by South Korea, while futures in US and Europe are slightly lower.

FI. European fixed income sold off yesterday amid the broad-based risk-on sentiment, Schnabel comments and restart of US fiscal stimuli talks. German yields sold off by 4bp to -53bp and remain firmly in our expected range of -60bp and -40bp. Intra-euro area spreads were mixed across jurisdictions as they were broadly unchanged in core/semi-core space, while tighter for periphery with the exception of Italian spreads widened. Curves steepened.

FX. EUR/USD broke the high from 1 September yesterday as the pair has found broad based support. EUR/GBP dropped back on rumours that Brexit negotiators have entered 'the tunnel'. EUR/NOK is anxiously awaiting the outcome of OPEC+ talks.

Credit. Credit markets saw strong performance yesterday where iTraxx Xover tightened to 251bp (-14bp) and Main too had a strong day, 46bp (-2bp). Cash bonds underperformed, with HY 3bp tighter and IG bonds 2bp wider. Risk-on was also visible in primary where Monte Paschi issued a EUR750m 5Y Senior preferred at MS+240, with an order book of EUR1.65bn.