Sterling and Gilts heavily sold as market loses faith in UK, allowing bond vigilantes to step in

EU mid-market update: Sterling and Gilts heavily sold as market loses faith in UK, allowing bond vigilantes to step in; US dockworkers reach tentative pact; US markets closed for Carter.

Notes/observations

- European indices are trading with a cautious tone today, with limited new catalysts. The focus is on the upcoming US Non-Farm Payrolls data due Friday, alongside the implications of the FOMC's recent minutes, which confirmed a cautious approach to rate cuts. Despite some dovish comments from Fed's Waller, the overall sentiment leans towards maintaining current rates longer.

- UK bond yields, particularly the 30-year gilt, continued to surge to highest since 1998, raising fiscal concerns as sterling falls, suggesting a possible capital flight and loss of confidence. The UK Treasury is attempting to reassure markets regarding fiscal policy amidst this backdrop.

- Political developments, including Trump's potential economic emergency declaration for tariffs and Biden's further restrictions on AI chip exports, are adding to the uncertainty. Biden administration said to unveil new tier-based system of chip curbs as soon as tomorrow; The result would be an expansion of current US chip trade curbs to global level, with most of countries fall into the second tier of restrictions, which establishes maximum levels of computing power that can go to any one nation.

- Retail updates from Tesco, Marks & Spencer, and B&M showed less than stellar performance, contributing to early morning underperformance in sector; Other European sector in focus is Insurance, weighed on by expected impact from LA fires.

- A tentative agreement between US dockworkers and management has been reached, averting a strike at East and Gulf Coast ports, if contract ratified next week, though this news negatively impacted Japanese and European shipping companies.

- DAX underperforms Europe, led by weakness in insurance names amid California fires and auto names such as Volkswagen, BMW and Mercedes.

- Asia closed lower with Nikkei225 underperforming -0.9%. EU indices are -0.1% to +0.5%. US futures are -0.2% to 0.0%. Gold +0.1%, DXY +0.2%; Commodity: Brent -0.1%, WTI -0.2%; Crypto: BTC -2.0%, ETH -0.9%.

Asia

- Japan Nov Labor Cash Earnings Y/Y: 3.0% v 2.7%e; Real Cash Earnings Y/Y:-0.3% v -0.6%.

- Australia Nov Retail Sales M/M: 0.8% v 1.0%e.

- Australia Nov Trade Balance (A$): 7.1B v 5.5Be; Exports M/M: 4.8% v 3.5% prior; Imports M/M: 1.7% v 0.0% prior.

- China Dec CPI Y/Y: 0.1% v 0.1%e.

- Bank of Japan (BOJ) Quarterly Regional Economic Report (Sakura): Maintains assessment in 7 of 9 r.

Europe

- UK Dec BRC Shop Price Index Y/Y: -1.0% v -0.4%e (lowest since Aug 2021).

- ECB’s Cipollone (Italy): Monetary policy should let economy run at potential. Too much caution risked being counterproductive. Excessive concern about possible future inflation shocks could be harmful.

- ECB's Villeroy (France) noted that the slight increase in Dec CPI data was expected and did not call into question its victory over inflation. Rates still significantly above the neutral level and makes sense for the ECB not to slow pace of rate cuts. Saw the neutral rate close to 2%.

Americas

- US Nov Consumer Credit: -7.1B v +$10.5Be.

- FOMC Dec Minutes had official notea gradual easing of labor market but no signs of any rapid deterioration. Some members saw merit in keeping policy steady.

- US dockworkers reached a tentative pact for six-year contract to avert strike at East Coast, Gulf Coast Port.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +0.03% at 513.82, FTSE +0.50% at 8,292.59, DAX -0.13% at 20,289.70, CAC-40 +0.12% at 7,461.18, IBEX-35 +0.45% at 11,850.77, FTSE MIB +0.06% at 35,131.00, SMI +0.41% at 11,909.40, S&P 500 Futures -0.17%].

Market focal points/key themes: European indices open generally lower but turned around in the early hours of trading to be mixed; dealers pointing to concern over tariffs likely weighing on risk appetite; among better performing sectors are materials and communication services; underperforming sectors include financials and industrials; oil & gas subsector supported on concerns over tight supply; no major corporate earnings expected in the upcoming US session.

Equities

- Consumer discretionary: Marks and Spencer [MKS.UK] -6.0% (Christmas trading update), Greggs [GRG.UK] -10.0% (trading update), Mears Group [MER.UK] +6.5% (expects FY24 results marginally ahead of current market expectations), Kongsberg Gruppen [KOG.NO] -1.5% (implements structural change: relocating maritime operations to Kongsberg Maritime), Delivery Hero [DHER.DE] +1.0% (Morgan Stanley resumed overweight).

- Consumer staples: Tesco [TSCO.UK] -2.0% (Q3 sales), SIG [SHI.UK] +4.5% (trading update - notes ongoing softness in the European building and construction sector).

- Financials: UBS [UBSG.CH] +1.0% (Kepler raised to buy) - Healthcare: Bayer [BAYN.DE] -0.5% (Elinzanetant study meets all primary and secondary endpoints).

- Industrials: Maersk [MAERSKB.DK] -5.5% (US dockworkers reached tentative deal), Volkswagen AG [VOW3.DE] -1.0% (deliveries).

- Technology: ASML [ASML.NL] -1.0% (Biden Admin to announce new system of chip curbs).

Speakers

- ECB Economic Bulletin stressed that it was determined to ensure that inflation stabilizes sustainably at its 2% medium-term target. To follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis.

- Poland Central Bank (NBP) Kotecki stated that saw room for rate cuts of 50-100bps in 2025.

- Malaysia Central Bank Gov Ghaffour stated that was confident domestic demand would remain resilient; economy in a sweet spot. Would continue coordinated effort to ensure healthy 2-way FX flows; manage risk of excessive volatility.

Currencies/fixed income

- USD maintained its firm tone during a quiet EU session. Price action continued to be supports over expectations that the Fed would likely slow down its pace of easing. Most recent Fed Minutes confirmed its more cautious stance about cutting interest rates with market expectations now not fully pricing in another 25 basis point-rate cut until Jun. Focus turning to the US jobs report due out on Friday.

- GBP/USD continued to move south as heightened fiscal concerns weighed on the currency and kept UK govt bonds moving higher. Dealers noted that rising Gilt yields and a falling GBP currency was "a classic sign of fiscal de-anchoring taking place and of participants losing confidence in the government in question's ability to exert control over the fiscal backdrop.

Economic data

- (DE) Germany Nov Industrial Production M/M: 1.5% v 0.5%e; Y/Y: -2.8% v -4.5%e.

- (DE) Germany Nov Trade Balance: €19.7B v €14.5Be; Exports M/M: 2.1% v 2.0%e; Imports M/M: -3.3% v +0.7%e.

- (NO) Norway Dec PPI (including oil) M/M: 1.1% v 3.3% prior; Y/Y: 9.3% v 0.0% prior.

- (DK) Denmark Nov Industrial Production M/M: -3.6% v 5.3% prior.

- (DK) Denmark Nov Current Account Balance (DKK): 46.9B v 46.8B prior.

- (HU) Hungary Nov Industrial Production M/M: -1.6% v +2.0% prior; Y/Y: -2.9% v -2.1%e.

- (HU) Hungary Nov Retail Sales Y/Y: 4.1% v 3.3%e.

- (CH) Swiss Dec Foreign Currency Reserves (CHF): 731.0B v 724.7B prior.

- (CZ) Czech Dec Unemployment Rate: 4.1% v 4.1%e.

- (CZ) Czech Nov Industrial Output Y/Y: -2.7% v -0.5%e; Construction Output Y/Y: +2.5% v -3.6% prior.

- (TW) Taiwan Dec Trade Balance: $6.1B v $8.8Be; Exports Y/Y: 9.2% v 6.0%e; Imports Y/Y: 30.4% v 15.5%e.

- (DE) Germany Dec CPI North Rhine Westphalia M/M: +0.5% v -0.3% prior; Y/Y: 2.5% v 1.9% prior.

- (DE) Germany Dec CPI Brandenburg M/M: +0.4% v -0.2% prior; Y/Y: 2.4% v 1.9% prior.

- (DE) Germany Dec CPI Baden Wuerttemberg M/M: +0.5% v -0.3% prior; Y/Y: 2.6% v 2.2% prior.

- (DE) Germany Dec CPI Saxony M/M: +0.5% v -0.2% prior; Y/Y: 3.2% v 2.9% prior.

- (UK) Bank of England (BOE) Decision Maker Panel (DMP) Dec Survey: 1-year ahead CPI from 2.8% to 3.0% (2.6%e); 3-year ahead CPI from 2.6% to 2.7%.

- (EU) Euro Zone Nov Retail Sales M/M: 0.1% v 0.3%e; Y/Y: 1.2% v 1.7%e.

Fixed income issuance

- (ES) Spain Debt Agency (Tesoro) sold total €B vs. €5.5-6.5B indicated range in 2028, 2031 and 2046 conventional SPGB bonds.

- Sold €2.596B in new 2.4% May 2028 SPGB bonds; Avg Yield: 2.586% v 2.277% prior; bid-to-cover: 1.50x v 2.18x prior.

- Sold €2.600B in 3.10% July 2031 SPGB bonds; Avg Yield: 2.897% v 2.768% prior; bid-to-cover: 1.59x v 1.35x prior.

- Sold €1.026B in 2.90% Oct 2046 SPGB; Avg Yield: 3.710% v 3.426% prior; Bid-to-cover: 2.18x v 1.58x prior.

- (ES) Spain Debt Agency (Tesoro) sold €515M vs. €250-750M indicated range in 2.05% Nov 2039 Inflation-linked bonds (SPGBei); Real Yield: 1.536% v 1.304% prior; Bid-to-cover: 1.99x v 2.38x prior.

- (FR) France Debt Agency (AFT) sold total €12.997B vs. €11.0-13.09B indicated range in 2034, 2036, 2043 and 2055 Bonds.

- Sold €7.059B in 1.25% in 3.00% Nov 2034 Oat; Avg Yield: 3.77% v 3.24% prior, bid-to-cover: 1.98x v 1.98x prior.

- Sold €1.840B in 1.25% May 2036 Oat; Avg Yield: 3.49% v 3.04% prior; Bid-to-cover: 2.85x v 3.97x prior.

- Sold €1.945B in 2.50% May 2043 Oat; Avg Yield: 3.77% v 3.36% prior; Bid-to-cover: 2.92x v 2.71x prior.

- Sold €2.153B in 3.25% May 2055 Oat; Avg Yield: 3.93% v 3.78% prior; Bid-to-cover: 2.37x v 2.84x prior.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-year, 5-year and 10-year bonds.

- 06:00 (IE) Ireland Nov Industrial Production M/M: No est v 5.7% prior; Y/Y: No est v 16.3% prior.

- 06:00 (PT) Portugal Nov Trade Balance: No est v -€2.5B prior.

- 06:00 (ZA) South Africa Nov Manufacturing Production M/M: No est v 0.4% prior; Y/Y: No est v 0.8% prior.

- 06:00 (RO) Romania to sell combined RON1.0B in 2026 and 2029 bonds.

- 07:00 (BR) Brazil Nov Retail Sales M/M: -0.3%e v +0.4% prior; Y/Y: 4.7%e v 6.5% prior.

- 07:00 (BR) Brazil Nov Broad Retail Sales M/M: -0.3%e v +0.9% prior; Y/Y: 4.9%e v 8.8% prior.

- 07:00 (MX) Mexico Dec CPI M/M: 0.4%e v 0.4% prior; Y/Y: 4.2%e v 4.6% prior.

- 07:00 (MX) Mexico Dec CPI Core M/M: 0.5%e v 0.1% prior; Y/Y: 3.6%e v 3.6% prior.

- 07:00 (MX) Mexico Dec Leading Indicators M/M: No est v -0.11 prior.

- 07:00 (MX) Mexico Dec Vehicle Production: No est v 351.5K prior; Vehicle Exports: No est v 289.3K prior.

- 07:30 (US) Dec Challenger Job Cuts: No est v 57.7K prior; Y/Y: No est v +26.8% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 09:00 (US) Fed’s Harker.

- 10:00 (MX) Mexico Central Bank (Banxico) Dec Minutes.

- 11:00 (UK) BOE’s Breeden.

- 12:40 (US) Fed’s Barkin.

- 13:30 (US) Fed’s Schmid.

- 13:35 (US) Fed’s Bowman.

- 18:00 (PE) Peru Central Bank (BCRP) Interest Rate Decision: Expected to cut Reference Rate by 25bps to 4.75%.

- 18:00 (CO) Colombia Dec CPI M/M: 0.4%e v 0.3% prior; Y/Y: 5.2%e v 5.2% prior.

- 18:00 (CO) Colombia Dec CPI Core M/M: 0.4%e v 0.3% prior; Y/Y: 5.6%e v 5.9% prior.

- 18:30 (JP) Japan Nov Household Spending Y/Y: -0.9%e v -1.3% prior.

- 19:30 (AU) Australia Nov Household Spending M/M: 0.6%e v 0.8% prior; Y/Y: 2.5%e v 2.8% prior.

- 23:00 (MY) Malaysia Nov Industrial Production Y/Y: 2.3%e v 2.1% prior; Manufacturing Sales Value Y/Y: No est v 3.0% prior.

- 22:30 (JP) Japan to sell 3-Month Bills.