US: The markets have a nervous tone ahead of today’s jobs report, where expectations have been elevated since the ADP report on Wednesday. With the expectations set very high and the diffusion of expectations very broad, the number should be a market moving event no matter the result. Treasuries rallied significantly yesterday on fears from Europe and a move towards less risky assets globally – despite the headwinds that a large job print could cause with respect to rates. Policy rates and inflation expectations are a potential flood that is being held back by a lackluster jobs market. The assumption is that the Fed will turn hawkish (and apparently admit to inflation pressures or succumb to bubble fears) if jobs data are bullish. We still believe the Fed is likely to let things run for a while on policy rates given the difficulties in trying to revisit stimulus if the exit is too early.
Europe: With the release of the EU paper yesterday that puts bondholder losses firmly on the table for European credits, the markets sold off markedly. Sovereign credit widened throughout the region and for the first time in a while, haircuts seemed to be viewed with questions of “how much” rather than “if and when”. Further, the idea that future sovereign credit issuance (the post 2013 idea) will be par assets when values now trade at depressed levels is an invalid pretence. The idea that the credit risk will change markedly in a few years has not been policy proven, and without such changes, there is no difference between the bonds now and the ones that will be issued. German trade surplus narrowed in November as the current account came in at €12B v €15.5BE and November Retail Sales disappointed at -2.4% v 1.0E.
Asia: China reiterated the importance of the Euro in its reserves portfolio, which underscores the importance of Europe as a trading partner for China – a country that is in the midst of trying to engineer a soft landing and grow domestic demand following a loan led expansion over the past two years. Fitch stating the Aussie flood impacts should be manageable.
From Brian Yelvington of Knight Capital
Europe: With the release of the EU paper yesterday that puts bondholder losses firmly on the table for European credits, the markets sold off markedly. Sovereign credit widened throughout the region and for the first time in a while, haircuts seemed to be viewed with questions of “how much” rather than “if and when”. Further, the idea that future sovereign credit issuance (the post 2013 idea) will be par assets when values now trade at depressed levels is an invalid pretence. The idea that the credit risk will change markedly in a few years has not been policy proven, and without such changes, there is no difference between the bonds now and the ones that will be issued. German trade surplus narrowed in November as the current account came in at €12B v €15.5BE and November Retail Sales disappointed at -2.4% v 1.0E.
Asia: China reiterated the importance of the Euro in its reserves portfolio, which underscores the importance of Europe as a trading partner for China – a country that is in the midst of trying to engineer a soft landing and grow domestic demand following a loan led expansion over the past two years. Fitch stating the Aussie flood impacts should be manageable.
From Brian Yelvington of Knight Capital
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