US trade expanded in December

• The US trade balance came in at -USD 80.7bn in December, somewhat narrower than the -USD 83.0bn predicted by consensus estimates, but a little wider than the -USD 79.3bn recorded in November. Encouragingly for the trade sector, both exports and imports saw relatively robust growth of 1.5% and 1.6% respectively, suggesting that some of the congestion at US ports that had hampered trade growth through 2021 is starting to ease. Trade in automotives expanded also, suggesting that some of the chip shortages which have held back car industries around the world may also be easing.
• Bank of France Governor Francois Villeroy has pushed back against some of the interpretation of recent ECB moves as hawkish, saying that there were reactions that ‘were very high and too high in recent days.’ He also maintained that inflation will slow to the bank’s target of around 2%, reiterating comments by ECB President Christine Lagarde on Monday.
• The UAE and Israel signed a number of agreements in the tourism and healthcare sectors on Tuesday, with ties between the two countries becoming steadily firmer since 2020.
• Poland’s central bank hiked its benchmark interest rate by 50bps to 2.75% yesterday, in line with expectations. The bank was one of the first to start tightening since the start of the global pandemic crisis, and this was the fifth hike in a row as it looked to try and curb accelerating inflation which rose to 8.6% in December.

Today’s Economic Data and Events

• 16:00, US MBA mortgage applications, week to February 4

Fixed Income

• US Treasury markets were relatively quiet overnight with yields on both the 2yr and 10yr rising modestly by the standards of recent days. Markets are likely waiting for the US inflation print out on February 10th for a clearer signal for their next move. San Francisco Fed President Mary Daly again affirmed the view that the Fed will lift rates in March but also said that the Fed “can’t be overly aggressive and can’t be too slow.” That would suggest to us support for a steady and transparent path of rate hikes rather than a shock 50bps move in March. Odds of a greater than 25bps hike at the March meeting have lengthened overnight.
• Moves were much more pronounced in European bond markets with yields on 10yr gilts moving to above 1.5% for the first time since 2018 before closing just shy of that level. Bond markets in the UK look to be pricing a sustained series of rate hikes as the UK will grapple with a cost-of-living crisis this year. In Germany, yields also edged higher with the 10yr bund yield settling at 0.261%, up around 4bps.
• In emerging markets South African bonds rose modestly with yields slipping 3bps on the 10yr local currency bond while Turkish bonds moved the opposite direction and yields ended the day 5bps higher at 21.42%.
• Indian bonds opened stronger overnight looking ahead to the RBI’s MPC meeting. Markets are expecting a 25bps hike at the meeting to take the target repurchase rate up to 4.25%.

FX

• The dollar swung back to strength overnight, gaining 0.26% on the DXY index as UST yields pulled higher, albeit marginally. EURUSD eased off some of its recent gains, falling by 0.24% to 1.1415 while USDJPY gained almost 0.4% to settle at 115.55. GBPUSD has been trading virtually unchanged all week, hovering around the 1.3540 level.
• The notable underperformer was USDCAD which gained 0.3% to 1.2708 as a move lower in oil prices weighed on the Canadian dollar. Among the other commodity currencies though price gains were positive with AUDUSD up 0.28% at 0.7146 and NZDUSD closing up 0.26% at 0.6650.

Equities

• Asian markets kicked the day’s equities trading off on a positive footing, with most major indices enjoying gains. The Shanghai Composite added 0.7%, while the Nikkei gained a more muted 0.1%. In India, both the Sensex and the Nifty gained 0.3%. The notable exception was the Hang Seng, which closed down -1.0%.
• In the US, all three major benchmarks rose, with the S&P 500, the Dow Jones and the NASDAQ adding 0.8%, 1.1% and 1.3% respectively. Most major European indices also saw modest gains, although the FTSE 100 dropped -0.1%.
• Local markets continue to be boosted by new major listings, with Abu Dhabi Ports enjoying strong gains on its first day of trading. This helped propel the ADX to close up 0.5% on the day, while Dubai’s DFM added 0.8%.

Commodities

• Oil prices fell a second day running on news that geopolitical tensions in Eastern Europe could be easing and that negotiators are returning to discuss the JCPOA. Brent settled at USD 90.78/b, down 2.1% overnight while WTI fell 2.1% to close at USD 89.36/b.
• The API reported a draw in US crude inventories of 2m bbl last week, including a 2.5m bbl drop at the Cushing price point. Gasoline and distillate stocks also fell. Meanwhile the EIA projects US oil output at a record of 12.6m b/d in 2023, 200k b/d higher than its previous estimate, and also revised up its forecast for output this year to 11.97m b/d.

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