📈 Market Report.
🕒 The market is nervously awaiting today’s US employment data. According to Reuters median projections, the unemployment rate is expected to remain at 4.2% in December, while employment is expected to increase by 160,000. However, three factors are driving fears that an overly strong labour market will hold back the Fed’s rate cutting policy: the first is extreme strength in the dollar over the last few weeks, the second is a definite rise in US bond yields discounting that traders do not expect an immediate rate cut and the third is a slowly weakening and deflating equity market. All this could change if the data shows a definitely weaker labour market. In contrast, if the report shows a strong labour market, we could see US bond yields approach 5%, levels not seen since before the 2008 crash.
🇺🇸 Overnight, U.S. trading was suspended in commemoration of former President Jimmy Carter’s funeral.
💷 The British pound hit its lowest level since late 2023, under pressure from a global selloff in bonds that has driven the UK government’s borrowing costs to their highest in over 16 years. The turmoil in the bond market could force Finance Minister Rachel Reeves to cut future spending, as higher gilt yields are seen as a clear response to the government’s fiscal expansion.
📉 Sterling has been one of the best-performing currencies against the dollar in recent years due to the Bank of England’s policy of keeping UK interest rates higher for longer than other major central banks. However, the UK is now struggling with slower growth, persistent inflation, and a deteriorating labor market, lagging behind the resilience shown in the US economy. The yield on 30-year gilts has hit its highest since 1998 above 5.3%, echoing the rise in global long-dated yields.
🔻 The current bond market turmoil is not as severe as the crisis in September 2022, when then-Prime Minister Liz Truss’ unfunded tax cut plans sent gilts into freefall.
🏦 Bank of England Deputy Governor Sarah Breeden has said that recent evidence supports the case to gradually cut interest rates, but it is difficult to gauge the right speed of easing. Breeden expects Bank Rate to come down over time as the effects of large shocks continue to abate. The BoE lowered interest rates to 4.75% from 5% in November but raised its inflation forecasts due partly to the budget measures.
🇩🇪 The German trade balance data for November published yesterday shows an improvement in the balance; however, it is from life to a stronger fall in imports what an increase in exports, which will continue to indicate skilfulness in the German economy. Fortunately, industrial production improved by a slight 1.5% over the previous month.
🇨🇳 China responds to rising bond yields in the US and other strong economies to the yuan. China’s central bank, the People’s Bank of China (PBOC), has suspended treasury bond purchases, citing a shortage of bonds in the market. As expected, the move has triggered a jump in yields, with the 30-year treasury yield climbing 5 basis points and the 10-year yield rising 4 basis points in early trade. The PBOC’s action is aimed at defending the falling yuan, as the widened yield gap between China and the U.S. has contributed to the yuan’s depreciation. The bond market in China has been on a decade-long rally, with 30-year yields recently hitting a record low of 1.8%.
🚗 China has blocked Europe’s access to critical raw materials for electric vehicle batteries, such as lithium and gallium, putting the EU’s electric car ambitions at risk. This move comes after the EU imposed tariffs of up to 40% on Chinese electric vehicles, prompting China to retaliate by threatening to tax European products. China has now limited the export of critical raw materials, and has asked its domestic automakers to halt investments in Europe, effectively cutting off the EU’s access to this technology. This situation is seen as extremely grave for the European auto industry, as China holds the two most crucial elements – technology and raw materials – for battery production.
📊 Market View:
📉 The cool and calm movement in US equities continues as markets await the release of today’s employment data. Mini S&P 500 futures are trading near 5,935. A bearish structure formed since November, which has taken the form of a shoulder-head-shoulder pattern with a double shoulder in recent weeks, points to the 5,850 level as critical. The loss of this key support could trigger a bearish move that would take prices towards 5,700 or even 5,650 levels.
📉 Nasdaq 100 futures are also showing signs of cooling, approaching the 21,000 support level. They are currently trading at 21,240 points, awaiting employment data.
💹 The dollar continues to set highs not seen since 2022, with its DXY index currently trading at 109.30 points. Only a weak employment report could generate a significant turnaround in this trend. Meanwhile, the US 10-year bond yield remains virtually unchanged at 4.70%. As a result, the EUR/USD continues to weaken, trading below the 1.03 level and currently at 1.0285.
📈 In Europe, the stock market continues to show resistance, with the DAX trading at 20,420 points, slightly below its all-time highs, but still very close to them. As we have pointed out before, this disconnection with the European economic reality could have negative consequences, and stocks will eventually pay the price for this decoupling.
🥇 As for gold, we mentioned in our report yesterday that it was gaining traction, and today it has surpassed 2,700 dollars per ounce after a strong rally in the last few hours.
⛽ Oil is also showing signs of recovery, again approaching the $78 per barrel level. At the moment, Brent is trading near $77.50.
💰 Finally, Bitcoin, after the sharp decline of the last few days, has started to recover. It is currently trying to approach the 95,000 dollar area again, trading at 94.165 dollars.
🌍 Geopolitics:
🇪🇺 According to Kaja Kallas, the bloc’s senior diplomat, if the US is no longer willing to coordinate military aid to Ukraine under Donald Trump, the EU is “ready to take over leadership.” Given the remarks made by a Trump adviser to Ukraine that we posted yesterday, which called for an end to the war within the next ninety days, this seems to be a reaction by the European bureaucratic system to prevent the negotiation process.
🇬🇱 The independence process in Greenland may in fact be behind Trump’s statements. There is a possibility that, if Greenland achieves independence, it may choose some territorial arrangement to join the US. As a reminder, during the Second World War, the US took control of Greenland’s territory during the Nazi occupation of Denmark.
🇸🇰 Slovakia’s Prime Minister Robert Fico is leading a campaign to pressure Ukraine’s President Volodymyr Zelenskiy to restart transit, citing higher energy costs for Slovakia and the region.
🛰️ Italy is in preliminary talks with SpaceX for a €1.5 billion ($1.6 billion) deal for encrypted communications systems, the largest such project in Europe. Opposition leaders have criticized the negotiations, arguing it could put Italian security at risk. Prime Minister Giorgia Meloni said the deal is about securing sensitive data and communications, and that SpaceX is “the most advanced doing this work because there are no alternatives and especially public alternatives.” SpaceX offers Starlink service for commercial applications and is developing a product called Starshield for defense and sensitive uses.
