• Financial markets were volatile this week amid confusing trade news, general elections in the UK and central bank meetings. Early optimism, underpinned by the progress on resolving two key overhangs (the US-China trade conflict and Brexit), faded at the end of the week.
  • The US President and Chinese officials said a limited phase-one trade deal has been reached. The US President confirmed that tariffs put on in September at 15% on $110bn goods rolled back to 7.5%, while December 15 tariffs were canceled. Nonetheless, 25% tariff rate on about $225bn of Chinese goods remains in place. Investors will wait and watch for more details, and mainly whether the two sides are on the same page as the Chinese side seems to have adopted a more conservative approach.
  • Regarding monetary policy, both the Fed and the ECB left their benchmark interest rates unchanged, as was widely expected, but both signaled that monetary policy will remain accommodative.
  • US domestic conditions remain solid, with November’s inflation data further supporting the Fed’s pause. Nov headline CPI rose more than expected to 2.1% y/y from 1.8% y/y (Cons: 2% y/y), driven by energy prices, while core inflation was unchanged at 2.3% y/y, as expected. In the Eurozone, improving confidence surveys still to be reflected in hard data. Industrial production in the Eurozone fell again in October (-0.5% MoM from -0.2%), in line with expectations, mainly dragged by the sharp fall in Germany (-1.6%) that contrasts with increasing output in France (+0.5%). German ZEW economic sentiment rose sharply in December (10.7 from -2.1; Con: 0.3), suggesting a better performance of both exports and private consumption in coming months.
  • The 10Y US and Germany bond yields ended unchanged this week, although they fluctuated abruptly. Sovereign yields had been on a swing during most of the week, inching down after the Fed and the ECB meetings, but jumping (US +10bps, Germany +6bps, UK +8 bps) after Trump hinted at an eventual interim deal with China. Moreover, German yields extended (by an additional +2bps) their increase after the UK elections results. Risk premia narrowed across peripheral bonds (Spain -9bps, Italy -8bps, Portugal -7bps) and in most EM countries.
  • In FX markets, safe haven currencies were sold. The depreciation in the USD was mainly led by the UK election results, which cleared the Brexit uncertainty, reducing the need to hedge the GBP. Conservatives secured an ample majority government and will allow Johnson to deliver Brexit on January 31. As a result, the GBP appreciated sharply (2%) after the elections. Elsewhere, the RMB appreciated, breaking down the USDCNY 7 threshold, while the EM appreciated across the board, with the exception of the TRY, which remained steady, after the CBRT cut interest rates more than expected.
  • Equity markets increased across the board (S&P +0.7%, Eurostoxx +1.2% MSCI Latam +1.5%), led by cyclical sectors, including banks (Eurozone banks +2.9%).

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