Markets
Italian PM Conte officially resigned today. Italian president Mattarella in a statement said he will first hold a round of talks before nominating someone to forge a fresh coalition. If Conte’s gamble plays out well, he’ll be mandated to form his third government in four years. Mattarella could also order new elections. Such a scenario however is very unlikely at the current stage, which is at least part of the reason markets aren’t bothered with the issue. Italy even outperforms peers on the sovereign bond market with spreads declining 4 bps. Other (European) markets were doing pretty good as well today. In its new World Economic Outlook, the IMF boosted global GDP growth in 2021 from 5.2% in October to 5.5%. A substantial improvement in expected US growth (from 3.1% to 5.1%) because of the end-of-year $900bn fiscal package is part of the reason. European and UK growth were shaved with respectively 1ppt and 1.4ppts to 4.2% and 4.5% because of the new and strong restrictions. Chinese growth is expected at 8.1% (slightly down from 8.2% expected in October). Needless to say the IMF in its forecasts assumes broad vaccine availability and major central banks to keep monetary policy to remain very easy through 2022. EMU stocks quickly extended opening gains to 1.8%+ (Germany). WS opens slightly in the green. The German yield curve bear steepens slightly with yields 1 bp (10-yr) to 1.3 bps (30-yr) higher. The EU successfully sold a new 7y benchmark social bond (MS-16 vs. guidance MS-13) for an amount of €10bn and tapped its 30-year bond (MS+5 vs. guidance MS+7) for €4bn to raise money for its SURE jobs programme. Investor bids amounted up to more than €115bn. The European bond sale meant a new monthly record of public sector bond sales of €124bn. The US yield curve shifts north, with yields up about 1bp across the curve.
The US dollar retained the benefit of the doubt during a risk-off Asian session but that didn’t last for too long. EUR/USD set an intraday low in the 1.211 area before rebounding to the 1.216 amid a brighter mood. The trade-weighted dollar slid from 90.6 (intraday high) towards 90.2. Cyclical currencies (AUD, NZD) lead the G10 scoreboard. The Czech krone outperforms local peers after governor Rusnok said rate hikes are still likely this year (cf. infra). Sterling’s resilience is remarkable. EUR/GBP ventured briefly north of 0.89 this morning but that test failed abruptly along with the green opening on equity cash markets. The UK leading the vaccination campaign in the western world seems to have put a decent bottom below sterling.
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Czech National Bank governor Rusnok confirmed that the outlook for gradual rate hikes in 2021 is still valid. He thinks that the country’s inflationary potential is incomparably higher than in the euro area, as the economy entered the crisis with a very dynamic economy showed some signs of overheating in the labour market and to some extent in real estate. A stronger currency and risks to the recovery mean that the policy rate won’t be hiked three times as implied in the central bank’s forecasts. Depending on how the economy behaves, anything is possible from zero to two hikes. The Czech currency strengthened to its strongest level against the euro since August after the remarks, nearing EUR/CZK 26 support.
The Hungarian central bank (MNB) kept its policy rates unchanged today. The MNB will maintain the difference between the base rate and the one-week deposit rate as long as warranted by inflationary risks. They will reallocate liquidity provided under its individual programmes from the collateralized lending facility towards government securities purchases. The latter will now also include securities with maturities of less than 10 years, ensuring continuous liquidity in the middle segment of the yield curve. The forint weakened somewhat ahead and after the decision with EUR/HUF rising from 357.50 to 359.
