The risk on vibes during the morning London session likely stoked demand for the higher-yielding Aussie and Kiwi, with the Aussie being the stronger of the two.
Interestingly enough, however, the safe-haven yen was also in demand and even managed to edge out the Kiwi near the end, despite the risk-on vibes. And this was likely due to the plunge in global bond yields during the session.
- Spanish unemployment change: -61.5K vs. -58.7k expected, 7.3K previous
- Swiss manufacturing PMI: 65.2 vs. 64.6 expected, 65.1 previous
- German unemployment change: -29.0K vs. -13.0k expected, -20.0K previous
- U.K. construction PMI: 52.2 vs. 52.8 expected, 53.1 previous
U.K. construction PMI
The U.K.’s December construction PMI reading came in at 52.2, which is worse than the consensus that it would ease from 53.1 to 52.8.
And a quick reading of Markit’s commentary paints a somewhat mixed picture.
On the one hand, “residential work expanding for the sixteenth consecutive month in December,” which contributed to “the fastest upturn in new order volumes since May.”
But on the other hand, there was a “moderate fall in commercial construction, thereby continuing the downward trend seen since July.”
Moreover, Markit noted that “companies expecting a rise in output levels remained among the weakest recorded since mid-2013, which survey respondents mainly linked to worries about the wider UK economic outlook.”
On balance, therefore, Markit’s commentary actually seems tilted more towards being negative since the continued weakness in commercial construction is bad news for business investments. Also, Markit pretty much spelled out that Brexit-related uncertainty continues to dampen investment intentions in the U.K. construction sector.
Risk appetite recovers in Europe
The major European equity indices staged a broad-based recovery today after sliding broadly lower yesterday, which is a sign that risk appetite is making a comeback.
And market analysts say that the risk-on vibes were due to positive news related to Christmas sales for British retailer next, which also boosted demand for other European retailers and improved overall risk sentiment.
Energy companies were also in demand, so recovering oil prices also likely helped to boost overall risk sentiment.
- The pan-European FTSEurofirst 300 was up by 0.22% to 1,529.46
- Germany’s DAX was up by 0.34% to 12,915.50
- The blue-chip Euro Stoxx 50 was up by 0.21% to 3,492.50
U.S. equity futures were also well-supported by the risk-on vibes in Europe and hinted that risk-taking may continue into the U.S. session.
- S&P 500 futures were up by 0.13% to 2,696.50
- Nasdaq futures were up by 0.16% to 6,525.25
Global bond yields fall
Despite signs of returning appetite for risk in the European equity and U.S. equity futures markets, global bond yields actually took hits, with European bond yields leading the downhill charge.
And according to market analysts, bond yields took a dive during the morning London session because the European Union’s Markets in Financial Instrument Directive II (Mifid II) will take effect starting today and investors were supposedly uncertain on how the new rules will affect the bond market.
- German 10-year bond yield down by 6.71% to 0.429%
- French 10-year bond yield down by 4.96% to 0.779%
- U.K. 10-year bond yield down by 4.11% to 1.235%
- Spanish 10-year bond yield down by 3.16% to 1.564%
- Italian 10-year bond yield down by 3.19% to 2.032%
- U.S. 10-year bond yield down by 0.51% to 2.453%
- Canadian 10-year bond yield down by 0.53% to 2.070%
Major Market Mover(s):
The higher-yielding Aussie ruled over all during the morning London session, likely because the Aussie (as well as the Kiwi) got a boost from the risk-friendly environment. It also probably helped that gold was able to cling on to its gains despite the Greenback’s recent rise.
AUD/USD was up by 12 pips (+0.17%) to 0.7833, AUD/CAD was up by 18 pips (+0.18%) to 0.9807, AUD/CHF was up by 38 pips (+0.50%) to 0.7642
The safe-haven yen managed to edge out the higher-yielding Kiwi and even gave the Aussie a run for its money, even though risk-taking was the name of the game during the morning London session.
Bonds yields were down, though, and yen pairs were very likely taking directional cues from those.
USD/JPY was down by 10 pips (-0.09%) to 112.25, GBP/JPY was down by 46 pips (-0.31%) to 152.26, CHF/JPY was down by 50 pips (-0.43%) to 115.04
The Swissy is considered a safe-haven currency as well. Unlike the yen, however, the Swissy doesn’t really take directional cues from bond yields, so the Swissy bore the full brunt of the risk-on vibes and was the worst-performing currency of the morning London session.
USD/CHF was up by 33 pips (+0.34%) to 0.9756, EUR/CHF was up by 24 pips (+0.21%) to 1.l730, GBP/CHF was up by 15 pips (+0.11%) to 1.3233
Watch Out For:
- 3:00 pm GMT: U.S. construction spending (0.5% expected, 1.4% previous)
- 3:00 pm GMT: ISM’s U.S. manufacturing PMI (steady at 58.2 expected)
- 7:00 pm GMT: FOMC meeting minutes will be released