Markets
Trading mainly developed through the risk angle today. The recent (European) corona setback outweighs the reflation story in the short run. End of quarter rebalancing out of stocks into bonds might have added to recent moves. European stock markets currently decline around 1%. The technical picture of the EuroStoxx 50 suggests more room for correction lower after last week’s failed test of 3867 resistance (pre-Covid high). The vaccination-driven uptrend still stands. First support kicks in around 3740. Main US indices open up to 0.5% softer. Technical picture of the S&P 500 and especially Nasdaq already turned less bullish and also point at a stronger downward correction. Core bonds thrived in today’s market with German Bunds outperforming US Treasuries. Apart from the especially European Covid-issues, US investors still have tonight’s 7-yr Note auction on their mind. It’s the closing operation of the end-of-month refinancing cycle. Two and five year note sales didn’t stir markets, but the longer the tenor the bigger the potential impact on demand arising from the steeper US yield curve. US weekly jobless unexpectedly declined from 781k to 684k, the lowest level since the week ending March 13 2020! Markets didn’t react though. The US Department of Labor noted that part of the drop was related to correcting fraudulent claims. “State systems are under attack by organized criminal groups and others who are using information stolen in past data breaches in our system to collect benefits fraudulently across multiple states.” US yields decline by 0.1 bp (30-yr) to 1.3 bps (10-yr) at the time of writing. The German yield curve bull flattens with yields shedding 0.5 bps (2-yr) to 3.5 bps (30-yr). 10-yr yield spread changes vs Germany widen by up to 3 bps (Greece).
The dollar continues to take the upper hand on the FX market. The trade-weighted dollar sets a new YTD high above 92.50 and taking out 62% retracement of last year’s final dollar setback (October – December). A sustained break makes way for a return to the September high (94.74) which is also near the 38% retracement level on the March-December USD-decline (94.47). EUR/USD is trying to tear down the 1.18 big figure. Yesterday’s move below 1.1836 opened up additional downside towards 1.1695/12 (38% retracement March/December & Sep/Nov lows). Trading dynamics in EUR/GBP changed today, with sterling taking over again and bringing the pair below 0.86 after failing to take out 0.8650 in recent session.
News Headlines
The Swiss National Bank kept its policy rate unchanged at -0.75%. The SNB reiterated its preparedness to continue to intervene in the currency market as needed as it still considers the franc as highly valued. However, the tone of its ‘currency warning’ was more modest than in December. Due to the rise in oil prices and the weaker Swiss franc, the SNB raised its inflation forecasts for this and next year respectively to 0.2% and 0.4%! This forecast is based on an unchanged policy rate over the policy horizon. The Swiss franc is gaining marginally today, but probably remains more sensitive to global factors rather than to domestic (monetary policy) developments. EUR/CHF trades in the 1.1050 area.
The central bank of South Africa (SARB) also left is tis policy rate unchanged at 3.5%. In this respect the central bank diverges from other emerging markets that recently raised rates due to rising inflation pressure. However, with the headline measure at 2.9% and core at 2.6%, February inflation was still below the central bank’s 3.0%-6.0% target range. It expects 2021 growth at 3.8% after a 7% contraction last year. The average 2021 inflation forecast was upwardly revised to 4.3%. The SARB sees the risks toward inflation outlook as balanced. Despite generally favourable global conditions and a considerable rand appreciation through the latter half of 2020 and into this year, the central bank still sees the rand currently below its estimated long-run equilibrium value. The rand weakens marginally after the policy announcement. USD/ZAR is testing the 15.00 barrier.
