Markets
Stimulus plans, both from central bankers and from fiscal authorities, are very helpful to inspire markets. In particular, upcoming/hoped-for fiscal stimulus often was more important as a driver for the reflation trade, rather than good news on corona or on the economic recovery. However, plans tend to lose their magic once they are published and when the practical details/possible hurdles become apparent. Some kind of buy-the-rumour, sell-the fact logic. This is more or less what happened with the $1900 mld new support plan that was communicated by upcoming President Biden overnight. $1900 bln is quite an impressive amount to support Americans to weather the impact of the pandemic and the step up efforts on testing and vaccination. However, some parts of the plan probably aren’t  that easy to get them approval in Congress. A hint on potentially higher taxes also didn’t help reflationary thinking. Markets this morning shifted into a guarded risk-off trade and sentiment dwindled further throughout the session. First big US Banks reporting Q4 earnings (Citi, Wells Fargo and JP Morgan) all posted stronger than expected results, but they were no game-changer for global trading. US eco data also disappointed. The Empire manufacturing survey unexpectedly declined from 4.9 to 3.5 (6.0) expected. Retail sales declined for the third consecutive month (-0.7% headline, -1.9% control group) and the November figure suffered a material downward revision too. Production data were the exception to the rule. The combined news of a mixed stimulus narrative and a rather poor eco reality check caused the Dow and the S&P to lose about 0.5% in the open. The Nasdaq outperformed (little changed). European equites are losing up to 1%. The risk-off also caps the topside in US yields. After setting a recovery top for the longer maturities early this week, US yields for 5 to 30y maturities are losing a further 2/3 bps. The German yield curve slightly bear steepens with yields rising between 0.9 bps (2-y) and 1.5 bps (30y), but this move only follows a very strong outperformance of Bunds yesterday. Intra-EMU government bond spreads again narrowed after a modest widening this earlier this week. Italia outperformed (10-y spread -5 bp) even as there is no solution for the government crisis yet.
On the FX markets, the gradual USD rebound simply continued. US real yields (10y -3bp) this time didn’t provide a viable explanation. However, the mild risk-off still was enough for some additional scaling back of USD shorts to continue. EUR/USD is drifting to the low 1.21 area. The TW dollar (DXY) regained the 90.50 handle. USD/JPY (103.75 area) showed no clear trend and held a tight sideways range in the upper half of the 103 big figure. EUR/GBP this morning tested the 0.8865 supported area, but a break didn’t occur. UK eco data were mixed (production data weaker than expected, but monthly November GDP better/less negative vs expectations). Strong technical resistance and risk-off sentiment prevented any further sterling gains. EUR/GBP is again trading in the 0.89 area.
News Headlines
The Dutch government will collectively resign after failing to win the backing of its coalition allies over issues on the country’s childcare benefit system. Thousands of families were falsely accused of making fraudulent claims during prime minister Rutte’s tenure and were demanded to return the child aid. Rutte will stay on in a caretaker government until the parliamentary elections on March 17 take place.
Turkish president Erdogan said cutting inflation will be a priority in 2021 and that it is important to do so by lowering interest rates, repeating his long-standing but unconventional view. Erdogan added he is against high interest rates and will continue to fight against them, “whether they listen or not”. The relatively new central bank governor raised policy rates end of last year from 10.25% to 17% to stem the slide in the Turkish lira. Erdogan’s comments spark worries that the central bank might soon come under pressure to reverse course. EUR/TRY jumped north of 9(.07).
