Markets
Investors weren’t convinced that yesterday’s 50 bps intermeeting Fed rate cut was an adequate way to address uncertainty on the impact of the coronavirus. US equities closed the day with losses of almost 3%. Today, sentiment improved for the better. There was no obvious new development with respect to corona. Maybe the good performance of Joe Biden in the primaries of the US democratic party contributed to a better sentiment. Whatever the reason, global sentiment turned more positive. A technical rebound resulted in gains of about 1%+ in Europe and about 2% for the major US indices. The final PMI services PMI was revised only marginally lower, but with little impact on trading. The same was true for the February US ADP labour report (solid 183k job growth but substantial downward revision for Jan). Compared to the violent swings over the previous days, the moves in core US and European yields were limited and price action was mainly technical in nature. The US yield curve reversed a cautious rebound earlier today and again (bull) steepens with the 2-y yield declining 6 bp and the 30-y easing 2 bp. German yields show a similar move (2-y -1 bp, 30-y little changed). The low absolute yield level is supporting a bid for peripheral bonds. Intra-EMU spreads narrow up to 4 (Greece)/3 (Ireland) bps. Italy underperforms (no change). An initial spread narrowing was undone this afternoon on headlines that the country was considering new measures, including a closure of schools. Later today, markets will keep an eye on the Fed Beige book, in search potential clues on the Fed’s reaction function with respect to corona. At time of finishing this report, the US non-manufacturing ISM is published at a very strong 57.3. However, we doubt it will be enough to inspire a sustained risk rebound.
On the FX market, the easing of global market stress (at least temporarily) and the’ bottoming’ of core/US yields also provided some comfort for the US currency. The trade-weighted dollar (DXY) rebounded to 97.50 (open 97.15). USD/JPY is trading in the 107.40 area after trading below the 107 big figure this morning. EUR/USD also returned part of its recent rally, currently trading in the 1.11 area.
This morning, sterling investors still pondered the chances of the BoE following the example of the Fed, potentially executing an (emergency) rate cut. The UK 10-y yield touched an all-time low level intraday. The 2-y yield is at the lowest level in more than 2 years. Sterling initially suffered from the rate cut speculation. EUR/GBP revisited the 0.8745 resistance area which was already tested over the last 48 hours. The final UK services PMI (53.2) was rather solid and hardly deviated from the preliminary reading (53.3). Initially, it didn’t help sterling much. Later, UK yields bottomed as global sentiment on risk improved, causing a mild reversal in sterling, too. Headlines also suggested that the UK might agree not to undercut EU rules in order for its banks and services sector to maintain access to that part of EU market. This might have been a minor sterling supportive, too. EUR/GBP is currently trading in the 0.8670 area. Cable hovers just north of 1.28.
News Headlines
The Canadian central bank copied yesterday’s action by the US Federal Reserve and cut its policy rate by 50 bps to 1.25%. The central bank stressed that it stands ready to adjust further if required. Higher than expected inflation is more than offset by tightening global financial conditions and weakening business/consumer confidence (related to corona outbreak). USD/CAD rises from 1.3340 to the high 1.33 region.
The US non-manufacturing ISM unexpectedly rose from 55.5 to 57.3 in February. A modest decline to 54.8 was expected. Details showed slightly decelerating business activity (from 60.9 to a still solid 57.8) but a significant increase in new (export) orders led to a piling up of work (backlogs rose to 53.2) and triggered an increase in employment (55.6 from 53.1).
