Markets
US January payrolls were Friday’s key trading event. With a mere 49k jobs (105k expected) the report signaled a stalling labour market after an already poor and even downwardly revised December month (-227k from -140k). Markets concluded that with such numbers additional US fiscal aid is only a matter of time. Especially after the US Senate earlier approved legislation that will allow Biden’s Democrats to roll out a stimulus package without GOP support. US stocks tested (DJI) or closed (S&P, Nasdaq) at new all-time highs. US yields swung wildly in the immediate wake of the payrolls report but eventually resumed the gradual uptrend. The yield curve bear steepening ended up in long term yields more than 3 bps higher (driven by rising inflation expectations). German yields missed out on the steepening (closed more or less flat after rising as much as 4 bps) due to bond market closing times.Peripheral spreads tightened. Italy (-2 bps) outperformed amid expectations Draghi will succeed in forming a new government. The disappointing payrolls threw EUR/USD a lifeline after breaking below the key technical support level at 1.2011 the day before. Dollar profit taking pushed the pair again north of 1.20 to finish at 1.2046. The trade-weighted dollar (91.04) retreated from the recently taken out 91.32 resistance level. USD/JPY stayed well north of 105. The British pound bull reaction after the Bank of England reversed a bit despite UK yields surging another 5 bps at the very long end of the curve. EUR/GBP remained south of 0.88 though.
Asian equity momentum is constructive after USTS Yellen’s plea for more stimulus sounds ever louder (cf. infra) and ECB’s Lagarde (recovery in the summer amid attractive financing conditions) voiced economic optimism. Japan’s Nikkei index (>29 000) outperforms, trading at its highest since the early nineties as its state of emergency might end earlier than envisaged. Brent oil briefly touched $60 per barrel while the inflationary trade is holding sway. Core bonds lose ground. The USD gains marginally against most peers, including the euro. EUR/USD is changing hands in the 1.203 area. The Chinese yuan strengthens slightly ahead of Chinese Lunar New Year starting later this week.
Today’s economic calendar is uninspiring, leaving trading up to overall sentiment. The week starts off on solid footing in Asia and looks set to roll over into European dealings as well. The US 10-yr yield is currently testing the previous 2021 high. The 30-yr variant is at a crossroad as well, flirting with the 2% at the upper bound of the upward trend channel. This week’s 10-yr and 30-yr bond auctions might be driving the move as well. We’re keen to see whether some short-term yield correction will take place in the aftermath. For the time being however, the recent steepening trends in core bond markets will likely continue. We are more neutral about the dollar and EUR/USD in particular. Friday’s rebound saved the couple last minute from a technical point of view. But the lack of follow-through gains (even losing a tad) this morning despite the risk-on suggests the pair is not out of the woods yet. Similarly, EUR/GBP rebounded on support around 0.875 but sterling still holds the (technical) advantage, at least short term.
News Headlines
Draghi is making progress to form a new Italian government. The left-wing Five Star movement, the biggest party in the lower House, and Matteo Salvini’s League, indicated they might support a Draghi government if some conditions are met. Moderate pro-European parties are also expected to support a Draghi government. Draghi could propose a new government as soon as this week. Italian markets last week rallied after Draghi was asked to form a government.
Yellen indicated that US job market needs a big fiscal support package. According to the Treasury Secretary, the US can return to full employment by 2022 if President Biden’s $1.9 tn stimulus package will be implemented. Without adequate support, it could take until 2025 for the US job market to recover, according to Yellen. Yellen’s renewed plea for big fiscal supported came after a disappointing US payrolls report released on Friday
