Euro at Three Year High on Possible Coalition Deal

On Thursday, the European Central Bank (ECB) delivered some good cheer to the EUR with a set of monetary policy minutes that supported market expectations that it will shift to a more ‘hawkish’ view this year.

The minutes noted that forward guidance and language regarding policy could be revisited in early 2018. They also noted increased confidence that inflation would take hold and that near-term downward pressure on core inflation is probably temporary.

Note: This increases the chances of the ECB ending asset purchases in September and may prompt speculation that rates could rise earlier than previously thought.

Pushing the single unit to new three-year highs (€1.2126) outright early Friday are reports that Germany’s two biggest parties, the CDU/CSU and SPD, have reached a preliminary deal on a formal coalition, which paves the way for the formation of a government.

Today’s U.S data could be seen as possibly reinforcing the ‘mighty’ dollar’s recent softness. The December readings, on U.S retail sales and CPI (08:30 am EDT), should again show a mix of good growth and subdued inflation. That, then, would likely reinforce the dollar’s recent softness. CPI could miss after yesterday’s PPI report showed some softness in services.

1. Stocks mixed results

In Japan, the Nikkei share average edged lower overnight as weakness in exporters weighed on the index, but strong gains in index-heavy Fast Retailing on record quarterly profit limited the losses. The Nikkei ended -0.2%, while the broader Topix declined -0.6%.

Elsewhere in Asia, most regional bourses recorded gains. The Shanghai Composite Index rose +0.1%, a record-tying 10th consecutive gain, while Hong Kong’s Hang Seng and South Korea’s Kospi were up +0.8% and +0.3% respectively.

Down-under, Aussie shares rose marginally overnight, as gains for miners outweighed losses for bank stocks, but the main index still had its worst week in tw0-months. The S&P/ASX 200 index closed up +0.04%, though it lost -0.9% this week. In New Zealand, the benchmark S&P/NZX 50 index erased earlier gains to end -0.1% lower, its worst week in over a year.

In Europe, regional indices trade flat to slightly higher across the board following on from another record close stateside overnight.

Futures on the S&P 500 Index have gained +0.2% to the highest on record.

Indices: Stoxx600 flat at 397.40, FTSE +0.1% at 7772, DAX +0.1% at 13219, CAC-40 +0.1 at 5492, IBEX-35 +0.4 at 10472, FTSE MIB 0.5% at 23417, SMI +0.3 at 9529, S&P 500 Futures +0.2%.

Brent Crude Oil

2. Oil prices are set for fourth straight week of gains, gold higher

Oil prices have eased from their three-year highs in the Euro session, but remain on track to end the week higher for a fourth consecutive week.

Brent crude futures are trading -15c lower at +$69.11 a barrel. The contract broke above +$70 a barrel yesterday for the first time in three years. U.S West Texas Intermediate (WTI) crude futures CLc1 are at +$63.45 a barrel, down -35c. On Thursday, WTI rallied to +$64.77, its strongest price since December 2014.

Note: Many analysts continue to warn about the risks of a price correction since the start of 2018, but they say overall market conditions remain strong, mainly due to output cuts led by OPEC and Russia.

Oil prices have also found support from eight consecutive weeks of U.S crude inventory drops. Data this week showed that U.S commercial crude oil stocks fell almost -5m barrels in the week to Jan. 5, to +419.5m barrels, or slightly below the five-year average of just over +420m barrels, the target for OPEC and others involved in output cuts.

Note: A recent market survey suggest that crude price expectations remain in a range of +$60 to +$70 per barrel for 2018.

Gold prices are set for their fifth week of gains, mostly supported by slump in ‘big’ dollar. Ahead of the U.S open, spot gold prices are up +0.1% at +$1,324 an ounce.

Note: Prices hit a near four-month high at +$1,326.56 an ounce on Wednesday.


3. Long date product yields back up

U.S Treasury’s yields have backed up again after minutes yesterday from the ECB December meeting suggests that the central bank was nearing a move to wind down its giant bond-buying program (QE).

Stateside, the yield on the U.S 10-year notes have been flirting with the psychological +2.6% handle this week – this reflects a growing market view that U.S inflation is about to pick up at the same time as G10 central banks shift to a ‘tighter’ monetary poly. Ahead of the open, the U.S 10-year yield trades atop of +2.564%. Investors will take guidance from this morning U.S inflation number.

In Germany, the 10-year Bund yield has hit a fresh five-month high of +0.539% this morning after Chancellor Merkel’s conservatives and the Social Democrats agreed a blueprint for formal coalition negotiations.

In the U.K, the 10-year Gilt yield has climbed +1 bps to +1.317%, the highest in six weeks.


4. Dollar on the back foot again

The USD is on soft footing against G10 currency and commodity-related pairs as the markets focus turns to this mornings U.S Dec CPI data and its impact on the rate outlook. The greenback turned softer yesterday after a disappointing PPI data.

EUR/USD (€1.2126) has managed to print a new three-year high ahead of the open stateside. Its initial boost higher came from yesterday’s perceived hawkish ECB Minutes from December that seemed to suggest that QE operations would probably end in September. The ‘single’ unit is also receiving support on news that negotiations to put together a Grand German coalition were optimistic.

GBP/USD (£1.3629) has moved above the pivotal £1.36 level on the back of overall USD weakness. This area has been a key technical resistance area in the aftermath of the GBP descent following the Brexit referendum in Jun 2016.

USD/CAD (C$1.2525) is off its recent highs as the pair has moved towards the lower end of the C$1.25 handle as the loonie has found some traction on rate differentials – the Bank of Canada (BoC) meet next week Jan 17 and fixed income traders are pricing in a +73% odds of a +25 bps rate hike. All of the loonies’ weakness this week has come on the back of the dissolution of NAFTA.


5. China reports biggest-ever annual trade surplus with U.S.

Data overnight from the world’s second largest economy – China – shows that its trade surplus with the U.S has hit a new record level in 2017.

Stronger growth in the U.S has pushed up demand for Chinese exports, expanding China’s trade surplus in goods by +10% to +$275.8B in 2017. Expect numbers like this to egg on the Trump administration criticisms about Chinese trade practices.

Note: The trade deficit with China is the U.S.’s largest with any trading partner and the 2017 print is the biggest with China in the nearly five decades. China’s surplus has now officially surpassed the previous record of +$261B in 2015. U.S figures put the 2015 deficit with China at +$367B.


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