The night belongs to the bond bulls, who have had a rough ride of it of late, with cries that the 30-year bull market is over. I have been cautious on this view and suggested there was still work to be done before we can make such claims with any conviction, although recognise the longer-term prospects of the Treasury market do face headwinds.
So, despite the recent claims from various high profile bond investors, we have seen reasonable buying across the US Treasury curve, with the 10-year Treasury now trading 2 basis points (bp) lower at 2.53%. The buying has been assisted by a well supported $12 billion 30-year Treasury auction (the bid-to-cover ratio was 2.74x), while a 0.1% decline month-on-month (2.3% annualised) in US producer price inflation (PPI) was also in play. While the actual read-through from PPI to CPI is low, there are clearly a few traders somewhat anxious about being short bonds or too long USDs ahead of tonight’s (00:30 aedt) December core consumer price inflation (CPI) report. A read on the annualised core CPI print of say 1.6% or below and bonds should fly and the USD will naturally follow suit.
I say ‘bond bulls’ have had a small victory, but that seems specific to the US and understand that things are not so great in Europe and if you want to be bearish bonds this has been the place to be. Although, we can see the Japan 10-year government bond also breaking out and this is creating JPY inflows, although shorting Japanese bonds is one of the hardest trades historically – it’s why they call it the “widow maker”. The ECB have caused a stir in markets, with the minutes from the December meeting detailing that the ‘language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited’. In effect, the bank are prepping the market for subtle changes in its policy settings over time, with headlines doing the rounds that “The ECB could consider a gradual shift in guidance from early 2018”. This is the main story of the trading session, although we also heard from ECB chief economist Peter Praet, who gave a somewhat more cautious take on the minutes, emphasising that forward guidance was key and trying to emphasise that nothing material was changing from these minutes.
Whichever way you slice and dice the narrative the market has responded and we can see a strong reaction in interest rate markets, with the difference between the Euribor futures December 2019 and December 2018 contracts blowing out to 37bp (+5bp), highlighting the market is seeing less policy stimulus in play in the period ahead. The fixed income markets have naturally responded, with good selling across the German bond curve, although front-end yields have moved slightly more aggressively. When we consider that the USD has found sellers across all G10 currencies, EUR/USD has naturally caught a bid and we see price now trading up at $1.2028, and just off the session high of $1.2059. The eyes of FX traders once again hone in on the September highs of $1.2092, although as we saw back on the 4 January high traders seem happy to fade moves into here.
(White – European vs US 2019-2018 interest rate differentials, Orange – EUR/USD)

In European equity land, we have seen modest weakness in European equities indices, but look behind the cover and see the good flows into European banks, who benefit from the re-pricing in European interest rate markets. The Eurostoxx banking index is now up for eight consecutive days, where I would play this through ETF’s and one can see solid moves of late in the EUFN ETF (iShares MSCI Europe financials ETF), where price resides at the strongest levels since June 2015.
The USD weakness has resonated, not just in G10 FX but also in good strength in emerging market assets. Outperformance has been seen in the Scandinavian currencies, but it’s worth highlighting that the AUD/USD has broken out of its recent consolidation phase and looks like a beacon of strength, with a likely test of the 79c level in play today. There seems little domestic data to drive today, and while some will point to China trade balance, this is a notorious difficult data point to read, not just because there is no set time, but also because it gets so badly reported. Also in G10 FX, USD/JPY could weigh a touch on the Nikkei 225, with a focus on whether it can break ¥111 today (currently sitting at ¥111.08) and more specifically the 27 November pivot low of ¥110.84, where a break, in my opinion, takes the pair into ¥109.10 (the low of the cloud). Flip the chart to a weekly timeframe and one can see a strong bearish outside week reversal in play, that again argues for lower levels, but much will be premised on the upcoming US core CPI print.
(Weekly USD/JPY chart)

So, with broad USD we can see solid moves again in gold, which is threatening a break of the recent consolidation phase. My preference though is platinum, which has gained 1.4% on the day and where we can see that seasonally holding long platinum positions through January is almost always a winner. In the past 15 years, we can see aside from 2016, where the price fell 2.3%, it has rallied every single year in this month! Oil has closed largely unchanged, as has copper and we can see mixed moves in bulk commodity, with spot iron ore closing +1% at $79.08, while iron ore futures are 1.6% lower.
The mixed moves in commodities have not resonated in US equities, which are moving higher here on reasonable volume and where energy is up 2% as a sub-index and materials 1%. If we look at BHP’s ADR it suggests an open for the heavyweight miner at $31.43 (+1.9%), with FMG eyeing Vale, where it is currently up 2% in its US-listing. European banks are steamrolling ahead, but we can see US banks moves have cooled a touch, although all eyes now fall on JP Morgan, who expected to report numbers at 22:45 aedt, with the consensus EPS west at $1.69 on revenue of $25.5 billion. Wells Fargo (00:00 – EPS $1.02, $22.41 billion) are also in focus.
Whether this good-will towards offshore banks flows into Aussie banks is yet to be seen, but given Aussie SPI futures are essentially unchanged and our ASX 200 opening call sits at 6070 (+3 points) and we can see a strong open in store for BHP, one would assume I would expect a fairly subdued open for the banks.
(Platinum seasonals)

Originally published by Chris Weston, Chief Market Strategist, IG