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Market Talk – December 21, 2015

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In Asia, the Nikkei opened heavy on the back of a weak U.S. closing on Friday. The continued sell-off in oil prices also gave up ground after Toshiba’s stock declined 9.8%. Meanwhile in China, reports were running around the street that additional stimulus were soon to be announced and encouraged a firmer Shanghai Exchange (+1.7%).

Meanwhile in Europe, despite all core markets trading in the black for a majority of the day, not one could hold on to the advance and all closed in the red (DAX-1%, FTSE -0.3%, and CAC -1.3%). Worth a mention here today is the weak Spanish IBEX 35 (-3.62%) after the weekend election proved inconclusive.

In the U.S., it was typical Christmas trading with low volume, little news, and an order driven market that made the day’s highs in the final 30 minutes of trading. Major institutions typically engage in book squaring for year-end and prefer not to report huge positions when avoidable.

Oil remains under pressure with WTI almost trading with a $33 handle at one stage this morning. The spread between WTI and Brent (Brent last seen $36.16) continues to tighten with global supplies easily outmatching a weak global demand. Gold saw a healthy rise today (last seen $1078 +1.4%), but you had a plethora of reasons/excuses to choose from, such as weak U.S. data, a stronger US$, concerns on the speed of Fed rate rise, weak oil prices, and finally the large option expiry at year end.

Today in the U.S. bond market we saw a little more curve flattening, but again only a small amount. Next year, we will be producing next a special report on the yield curve flattening, as we were forecasting at the Berlin Conference. The front end seems to have found its comfort level with little or no movement throughout the day. Two-year notes closed 0.955% with a 2.5bp range; 10s closed almost unchanged at 2.19% despite a small sell-off (down to 2.21%). By the close, we returned to close unchanged. 2/10 curve closed tonight 123.5bp. Germany’s 10yr Bund closed +0.5bp at 0.555% and the spread closed +163.5BP.