Markets
Trading on global markets was mainly order driven and technical in nature. There were no eco data with market moving potential in EMU. In addition, European markets also lacked any guidance from the other side of the Atlantic as US markets are closed in observance of the Martin Luther King holiday. Chinese Q4 growth data published this morning confirmed the Chinese economy as being the locomotive for global growth as other countries, in particular the US and Europe, still have to cope with a flaring up of the corona pandemic, clouding the outlook on the recovery. Chinese equities gained about one 1% this morning, but this positive sentiment didn’t really spill over into broader markets. European equity markets are trading mixed to marginally in green as investors look forward to upcoming events later this week, including confidence votes for the Conte government Italy (this evening and tomorrow), the inauguration of Joe Biden as US president (Wednesday) and the ECB policy meeting (Thursday). The cautious investor mindset today didn’t help a further gain in German bunds. German yields show tentative signs of bottoming after quite a sharp setback for longer yields last week. The German yield curve bear steepens with yields rising between 0.3 bps (2-y) and 2.9 bps (30-y). On Thursday, the ECB might warn for short-term downside risks to the recovery, but won’t change its strategy as communicated in December, even as the minutes if the meeting showed quite some internal discord. Flexible bond purchases remain the key policy tool. The ECB won’t rule out a rate cut in case of a sharp deterioration in the economic outlook. However, as vaccinations support the hope for a gradual return to normal later this year, the probability of a further rate cut might further evaporate as time passes. If so, this should put a floor to core European yields. Intra-EMU spreads widened marginally today, with Italy still slightly underperforming (10-y spreads versus Germany widening 2 bps) as markets are pondering the consequences of the political crisis in the country.
On FX markets, the dollar is keeping the benefit of the doubt. The trade-weighted dollar (DXY 90.90 area) is drifting further north, with first resistance at 91.02 and 91.24 coming closer. EUR/USD (currently 1.2065) intraday touched the lowest level since early December. The 1.2011 level remains the key point of reference. Sterling initially weakened and EUR/GBP rebounded (temporarily?) north of 0.89 after last week’s rejected test of the key 0.8865 support. However, the rebound stalled during the day. EUR/GBP currently trades again near the 0.89 big figure. ST UK yields are well off the rebound top set last week after BoE governor Bailey questioned the case for a negative policy rate. However, with the 2-y yield at -13 bp, the market still hasn’t completely given up the idea. In the commodity markets, Brent oil stabilizes near $55 p/b after last week’s correction.
News Headlines
Press agency Reuters cites unnamed Indian government sources who said that the country is considering hiking import duties of 5%-10% of more than 50 items. Indian PM Modi hopes to raise an additional 200bn rupees ($2.7bn) via the measures, while simultaneously supporting his nationalist agenda to promote (and protect) Indian manufacturing.
The Turkish lira traded on the softer side today after remarks from Turkish President Erdogan late on Friday. He recalled his uncommon view that higher interest rates lead to higher inflation. “Whether they’ll listen or not, I’ll continue my struggle. There’s one thing I believe in: we can’t achieve anything with high interest rates”. The renewed attacks come after a volatile period where both the Turkish central bank governor and Minster of Finance were axed. The incoming CB governor reacted with monetary orthodoxy (raising policy rate to 17%), but is now facing political pressure. The central bank convenes on Thursday. EUR/TRY rose to 9.10.
