Markets
Fed Chair Powell faced a tough decision. Either sticking with the optimistic H2 growth scenario and risk triggering fresh tapering bets or admitting near term economic hardship to put the tapering genie back in the bottle. He eventually opted for the 2nd scenario. The Fed statement notes that “the pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adverselyaffected by the pandemic”. During the press conference he strengthened his sobering message by calling tapering talk premature and by pointing out that the economy remains a long way from the central bank’s employment and inflation goals. Powell also clearly indicated that the macro-economic picture is far more important than potential froth in some markets, putting the latter in the hands of macroprudential regulation. The market reaction on Powell’s message was rather muted, though it added fire to some intraday trends which centered around risk aversion. European stock markets ended the trading day around 1.5% lower with WS losses even bigger at around 2.5%. The move thus comes despite Powell’s reassuring message and despite strong earnings recently by some US big tech names. The slower-than-expected vaccination process takes the market narrative hostage. From a technical point of view, bullish short term equity pictures start turning neutral. Core bonds thrived in this market setting with US Treasuries outperforming German Bunds after the amplifying Fed message. The US yield curve bull flattened with yields dropping 0.2 bps (2-yr) to 1.7 bps (30-yr). The US 10-yr yield closes in on 0.98% support. The German yield curve bull steepened with yields changes between -1.8 bps (2-yr) and flat (30-yr). Quotes from ECB Knot, who said that the ECB has the tools (deposit rate cut) to counter euro strength if needed, might have played a role. We remain highly skeptical against the possibility of another ECB rate cut. The combination euro weakness and risk aversion outweighed Powell’s dovish message, sending EUR/USD briefly below the 1.21 big figure. Key support stands at 1.2011. The trade-weighted dollar rose from 90.15 to 90.65. EUR/GBP reached a minor intraday low in the low 88-area before closing broadly unchanged around 0.8850.
Asian stock markets copy yesterday’s weakness on WS with main indices also shedding up to 2.5%. While the risk correction will probably remain today’s market driver (softer stocks, stronger core bonds & some dollar momentum), the eco calendar is nevertheless interesting with EC confidence data, German inflation numbers, US weekly jobless claims and US Q4 GDP data. The US Treasury ends its end-of -month refinancing operation with a $62bn 7-yr Note auction.
News Headlines
Iron ore futures collapsed more than 6% at some point on the Singapore exchange today as China reiterated its pledge to curb steel production, sending shivers down the spine of investors. Markets have pushed iron ore more than 70% higher last year amid expectations of a strong post-pandemic recovery in China and the rest of the world.
French finance minister Le Maire said he is considering transforming some state-guaranteed loans into actual grants to help companies hit hardest by the pandemic to stem defaults. Looking at an ever higher wall of debt, some companies have sounded the alarm over their ability to repay the money. France has issued about 130 billion euros of state-guaranteed loans, mostly to small companies.
If the US would lift the 25% steel and 10% aluminum tariff imposed by Trump in 2018, the EU would respond by immediately scrapping its retaliatory duties,EU Ambassador to the US Lambrinidis said. He urged for resolving the trade disputes “quickly, effectively and now”. The EU slapped a 25% duty on €2.8bn of US imports that included bourbon whiskey and Harley-Davidson motorcycles.
