Markets
Friday’s bad news (poor US payrolls) turned good news for markets. It revived calls for ample additional US stimulus and as such reinforced the reflation trade. Reflationary thinking continued this week supported by public comments from the Biden administration (Yellen). The administration is gradually leaving the idea of bipartisan approval of new stimulus. A big amount is more important than broad support. Several financial parameters yesterday touched record levels (US equities) or high profile references (10y and 30y yield reaching 1.20% & 2.0% respectively; US curve steepness and 10-y inflation expectations nearing multi-year peak levels; Brent oil at $60/b +). With few eco data or other news, the reflation trade took a breather today. German December foreign trade data were marginally better than expected. US NFIB small business confidence declined a bit more than expected (95 from 95.9, vs 97 expected). Evidently, these data didn’t change the picture for trading. For now it’s nothing more than a pause rather than a correction. European and US equities are holding near the cycle top respectively record levels reached yesterday (EuroStoxx & S&P -0.3%). Core bond markets paint a mixed picture. US yields show a modest correction on the recent steepening trend with yield changes between +0.2 bps (2y) and -3 bps (30y). Later today, the US Treasury will sell $58 bn of 3y notes. However, given the recent rise in LT US yields/curve steepening, markets are even more focused on the 10y sale ($41bn tomorrow) and the 30y sale ($27bn, Thursday). Success (or the lack of it) might decide on the fate of rate uptrend in LT US yields. Recently, European LT yields also succeeded an, albeit much more gradual, rise. This move slowed yesterday, but a real correction didn’t kick in. German yields rise by up to 0.75 bps (30y). On the intra-EMU bond markets, the outperformance of Italian BTP’s continued. The Italian 10y yield touched an all-time low at 0.50%. The 10y Italian spread versus Germany also dropped further (94 bps). Markets apparently have good faith that Mario Draghi will succeed both in establishing political stability and at same time starting the long journey to structural reform.
The dollar correction that started post-payrolls simply continued even as other components of the reflation trade stalled. Especially the decline in USD/JPY is striking. The pair tumbled below the 105 barrier overnight and later settled in the 104.60/70 area. Are US (real) yields still too low to become attractive for Japanese investors? EUR/USD also quite easily returned to the 1.21 area, even as risk sentiment turned more cautious. Only a few days ago the EUR/USD picture showed worrisome cracks. At least for now the working hypothesis, that this was still nothing more than a correction on the established USD downtrend, still survives. Sterling (in particular EUR/GBP) found a new ST- equilibrium after last week’s BoE driven rally of the UK currency. The pair hovered up and down in the upper half of the EUR/GBP 0.87 big figure without challenging important technical levels.
News Headlines
The European Commission pressed governments to come up with original ideas to digitalize their economies and fight climate change when they submit investment plans to tap the EU Next Generation funds. The Commission said draft proposals show a bias to spending instead of structural reform to meet the EU’s ambition for a greener and digital economy. Under the €750bn plan, some €672.5bn will be distributed among EU countries (loans and grants) while the remainder will go to joint EU projects.
Spain is looking for additional measures to support companies’ solvency soon, the government’s economy minister Calvino said today. Sources close to the matter said the government is working together with the Bank of Spain to have a framework of measures that could include haircuts on state-backed loans as well as direct state aid to alleviate a growing corporate debt burden.
