Markets
Changed fortunes for European and US stocks yesterday compared to Monday. European indices this time gained around 1% while main US benchmarks closed with small losses. Passing US fiscal stimulus through Congress won’t be a walk in the park while officials already started downplaying yesterday’s comments by President Biden suggesting wide availability of vaccines by Spring. Yesterday’s session was overall muted though. German Bunds underperformed US Treasuries. Changes on the US yield curve ranged between -0.1 bp (30-yr) and +0.7 bps (7-yr). The US Treasury’s huge $61bn 5-yr Note auction was mixed, with auction stopping through the WI yield. The German yield curve bear steepened with yields rising by 0.4 bps (2-yr) to 2.1 bps (30-yr). 10-yr yield spread changes vs Germany narrowed by up to 5 bps with Italy outperforming (-5bps). Italian President Mattarella will meet with the speakers of lower and upper house today to try to end the political crisis after yesterday’s forced resignation by PM Conte. EUR/USD remains in no one’s land,closing the day at EUR/USD 1.2160 from a 1.2139 open. EUR/GBP’s attempt to regain the 0.89 big figure returned as a boomerang, sending the pair back to the danger zone. The EUR/GBP 0.8852 close was the lowest since May.
Overnight risk sentiment is mixed in Asia. Nasdaq futures benefit from strong Microsoft earnings. FI and FX markets don’t give any strong guidance for the start of trading. Focus turns to the FOMC today. Some Fed governors floated the idea to start slowing down asset purchases (currently $120bn/month) as early as the end of the year. This view is a minority one, though. Fed members seem to agree that the combination of US fiscal stimulus from the Biden administration and the vaccination campaign, will drive a very strong H2 economic recovery. Yesterday’s upgraded global IMF growth forecast was for a large part on account of a stronger prognosis for the US (5.1% in 2021 from 3.1% in October). This implies that slowing down purchases will become topic of debate later this year. However, Fed Chair Powell will do his utmost best to keep the genie in the bottle for at least a couple of months and confirm the Fed’s extremely accommodative monetary policy stance as a reality check with Covid-19 developments and not frontrunning US Congress’ actions. Powell could lift US Treasuries further with the US 10-yr yield moving towards the 0.98% support level. The dollar could be forced back into the defensive.
News Headlines
Australian inflation rose a slightly faster-than-expected 0.9% q/q in the fourth quarter last year bringing the yearly gauge to 0.9% y/y. That’s a deceleration from the previous quarter (1.6% q/q) and still well below the RBA’s 2-3% inflation target. Moreover, headline inflation was in part driven by temporary effects (bi-annual indexation of tobacco excises). Core measures also narrowly beat consensus, ranging from 0.4%-0.5% q/q or 1.2%-1.4% y/y. The Australian dollar slightly weakened to 0.774 against the USD.
The Chinese central bank has been draining funds from the banking system for a second day straight. The move caught investors by surprise, whom have been expecting the opposite from the PBOC to meet strong cash demand going into the week-long Lunar New Year holiday (starting on Feb 11). Earlier this week PBOC advisor Ma Jun said shifts in monetary policy would be appropriate to prevent bubble risks from rising. China’s short-term money market rates are surging in the past few days, with its benchmark one-week repo rate at the highest since 2018.
BoJ governor Kuroda said its ETF buying is not distorting markets when asked about potential side-effects. Even though the central bank now holds about 80% of Japan’s ETF market, it only owns 7% of total shares listed on the Tokyo Stock Exchange, Kuroda said, adding that the buying frequency and size has fallen sharply recently. His comments suggest the BoJ won’t make major tweaks to its ETF programme when a policy review is due in March.
