Markets
Global markets yesterday initially extended the risk rebound from earlier this week, but the move gradually slowed, especially during the US trading session. US indices closed little changed. The eco calendar was interesting, with data mostly coming out above expectations. EMU headline and core inflation jumped to 0.9% and 1.4% respectively, but the rise was already flagged by data from member states. In the US ADP job growth (174K vs 70k expected) and the services ISM (58.7 from 57.7) also pointed to a resilient economy. Data supported the established steepening trends. German yields rose between 0.8 bp (2-y) and 3.8 bp (30-y). The US yields added 0.4% bp (2y) to 5.6 bp (30-y), with 30-y/5y spread at a multiyear top. On the intra-EMU bond markets, Italy sharply outperformed as Mario Draghi was asked by president Mattarella to from a new government (-9bp, 10y spread vs Germany). On the FX markets, the dollar and sterling retained the benefit of the doubt,especially against the euro. EUR/USD again tested the low 1.20 area, but closed at 1.2036, off the intraday low. EUR/GBP showed a similar picture with a test of the 0.88 barrier intraday, but a close at 0.8913.
The risk rally slows on Asian markets this morning, with most markets showing modest losses (0.5-1.0%). The mild risk-off keeps the dollar in the driver’s seat. The trade-weighted dollar (91.30) is testing the highest level since early December. Even so, oil also maintains its upward bias ($58.80) as OPEC continues its efforts to balance the market.
Today’s eco calendar is rather thin. In the US, the weekly jobless claims are expected to ease slightly further from 847K to 830k. Of late, US labour data/indictors were not that bad given the ongoing impact of the pandemic. Even so, the market still is at least as much focused on (fiscal) stimulus as on hard data. In this respect, investors can keep the hope that the US administration will provide an additional fiscal injection. This doesn’t guarantee a daily rise in equities and yields, but the trend, especially in yields, looks well supported for now. The US 10-y yield (1.14%) is nearing the correction top of 1.185%. The 30-y yield (1.93%) is already setting a new post-corona top, illustrating the protracted steepening. German 10-y yield and 10-y EMU swap are also nearing first resistance at -0.45% and -0. 15% respectively. On the FX market, EUR/USD is struggling not to fall below the 1.20 handle. The move probably is both due to a dollar rebound, but also contains some underlying euro softness. The impact of ongoing restrictions on the EMU economy and a difficult start of the vaccinations might delay the EMU return to normalization. A break below EUR/USD 1.20 would make the picture neutral short term. Will tomorrow’s payrolls decide on such a move? The Bank of England probably won’t change policy rates and the amount of asset purchases. The BoE might downgrade its assessment on the short-term outlook and is will release its assessment on the feasibility of a negative interest rate. Such a move is not expected anytime soon, but if the Bank keeps the option open, it might slow the recent sterling rebound. EUR/GBP might look for a bottom in near the 0.88 level short-term.
News Headlines
The Polish central bank left rates unchangedat 0.1% during its policy meeting yesterday. It will also continue to purchase government securities to ensure liquidity and enhance the monetary policy transmission. The NBP repeated its pledge to intervene in the FX market to strengthen the easy policy stance, referring to a “lack of a visible and more durable zloty exchange rate to the global pandemic shock”. Monetary support is needed to help the Polish economy recover from a hit to economic activity (services in particular) in 2020Q4 after new restrictions were imposed. EUR/PLN trade little changed near 4.48.
Australia’s trade balance rose less than expected in December from A$5022 mln to A$6785 mln (A$8750 mln expected). Exports rose 3% m/m while imports declined 2%. The Aussie dollar still tops the G10 scoreboard this morning though as details showed iron ore exports, a key commodity for Australia, rose 21.1% to a fresh record high of A$12.6 billion (on a total of A$32.3 bln exports). China by far remains Australia’s most important trading partner in December, followed by Japan and the USA.
