Calm to return, at least temporary?

KBC Market Research Desk KBC Bank

European equity markets had their worst performance since the Brexit referendum in June 2016, with losses over 3%. Markets took a breather on Wednesday with US markets being closed, but the global equity selloff continued on Thursday. And how. The arrest of Huawei CFO in Canada, with the US seeking her extradition, lighted the fuse. Investor hopes of US-Sino trade talk progress vanished like smoke in the wind, despite attempts of both sides to reassure markets. Risk deterioration took over for the rest of the day, as there was no European data to calm investors. German yield curve bull flattened with changes ranging from -1.8 bps (2-yr) to -5.1 bps (30-yr). In the run up to US openings, market moves accelerated. US economic data missed expectations by a small margin, but wei remained strong whatsoever. Dallas Fed president Kaplan struck a cautious tone on US growth and urged for patience. Different sources suggest that the FED will signal a new wait-and-see mentality after a likely interest-rate increase at the next meeting of Dec. 18-19. US markets first continued the ‘all hands on deck" sentiment with US equity markets falling at opening and US Treasuries edging up. However, markets calmed afterwards. US equities stranded around Wednesday's close, while US Treasuries paired most of its intraday gains. The US yield curve bull steepened with changes from -1.0 bp (30-yr) to -3.5 bps (2-yr).

The improved sentiment on US markets continues in Asia this morning, as the major Asian-Pacific equity benchmarks moved up for the final session of the week. China is lagging behind. OPEC meets today for the final meeting of its Vienna summit further discussing a possible supply cut. Sources confirmed they agreed on a cut of 1 million barrels a day, but remain in disregard on how to divide. Russia joins discussions today, with the Saudi Arabian energy minister striking a pessimistic tone on a deal being made by tonight. A negative outcome is a wildcard. We suspect downward pressure for the German Bund at opening, in a catch up with US Treasuries.

Today's eco calendar contains the University of Michigan consumer expectations and the US payrolls report. Markets expect that 199k new jobs are created in November, down from 250k the month before. The unemployment rate (3.7%) and the weekly earnings (0.3% M/M, 3.1% Y/Y) are expected to be stable. We don't expect surprises and if any, they will need to be big to rattle investors even more. Canada joins the US in publishing labour data. Fed's Williams and Brainard speak today, as does BoE's chair Powell.

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KBC Market Research Desk

KBC Bank

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