Talking Points:
- Global government bonds slid this past session as confidence in stimulus-propped assets struck the core asset
- Euro rally falters after Nowotny says December ECB meet will weigh Taper, Pound's GDP lift cut down by Hammond
- Top event risk ahead are the US 3Q GDP report and Standard & Poor's UK sovereign credit rating update
See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.
When looking to assess global market sentiment, the first instinct is to evaluate the benchmarks on the 'risky' end of the spectrum. This past session, the US equity benchmarks were lower but global shares held up. Emerging market and high-yield standards took a moderate dive. But, Yen crosses were up on the day. The mix was not the highly correlated and motivated trend of capital away from troubled assets into those that were absolute havens. However, there was an unusual outlet for sentiment in the form of government debt. US Treasuries extended a retreat to 5-month lows with its counterparts in Europe and Asia following suit. Normally the slide in bonds - and rise in yields - would be a sign of risk appetite or optimism of rate hikes. After years of QE programs and heavy central bank distortion, it now takes on the guise of underlying risk aversion via the central banks' primary financial transmission tool.
Risk aversion has struggled to gain traction since markets broke tempo from the persistent advance back in 2015. An increasing safety net of global monetary policy and desperation for return cemented complacency. Yet, erosion in a crucial structural piece like Treasuries may finally tip the scales. In the meantime, traditional economic catalysts can add or subtract weight. The after-hours release of Google and Amazon earnings (the former better than expected and latter worse) will put the tech-oriented Nasdaq in a position of judgement. The 3Q US GDP figure on tap Friday will offer a more decisive read. A weak showing from the world's largest economy poses the greatest threat given the current backdrop on sentiment and the high forecast (2.6 percent) sets a high watermark.
Another aspect of the US growth report that will carry asymmetrical influence is rate speculation. With Fed Fund futures pricing in a 72 percent probability of a hike on December 14th, driving expectations higher will require a more exceptional outcome to carry through the next 6-8 weeks to the actual meeting. Alternatively, a weak showing could permanently instill pessimism and dovishness. Heading into the release, the Dollar has firmed once again on the weakness of its major counterparts. ECB's Nowotny affirming the December 8th meeting would establish the future of its QE program while UK Chancellor of the Exchequer Hammond voiced caution following the stronger UK GDP release left the Greenback one of the few viable outlets. For the Pound, traders should be sure to keep an eye on the Standard & Poor's UK sovereign debt update. Brexit talk is a constant driver for the Sterling. We discuss event risk and driving themes in today's Trading Video.
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