Markets
The reflation some kind of stranded. Equities, yields and market based measures of inflation (expectations) extensively anticipated the economic upswing that will hopefully developed later this year due the restart of social live and ample policy stimulus. The trends as such probably shouldn’t be questioned, but some recent data/events (soft US inflation, technical test of LT US yields, soft Powell comments) slowed the momentum, putting parts of the market in a holding pattern. Today’s eco calendar contained no high profile topic to unsettle this stalemate. The European Commission Winter (interim) economic forecast only confirmed the feeling that the recovery will probably come later than hoped-for. The EC expects the EMU economy to grow 3.8% this year (4.2% expected in autumn). On the positive side, the 2022 forecast was upwardly revised from 3.0% to 3.8%. Both the 2021 and 2022 growth performance evidently remain highly dependent on a successful vaccination rollout. EMU 2021 inflation was upwardly revised from 1.1% to 1.4%. However, 2022 inflation at 1.3% remains far away from the ECB inflation target. The market reaction was limited, but also didn’t help the revive reflationary spirits. US initial jobless claims also provided little help. Weekly claims printed at 793k (versus 760k expected) and previous figure was upwardly revised. Still, European equities mostly trade higher (up to 0.6%). US equities continue to challenge historic record levels, with major indices gaining between 0.25% and 0.5%. US yields show a mixed picture after yesterday’s decline. Yields at shorter maturities (2 & 5-y) are little changed. Long tenors underperform (30-y +1.2 bps). Later today, the US Treasury will conclude this week’s refunding with a $27 bln sale of 30-y paper. German yields still had some catching up to do on yesterday’s US setback. Yields decline between 0.6 bp (2-y) and -2.8 bp (10-y). Intra-EMU yields spreads versus Germany (10-y) were little changed to marginally wider (Spain +2 bp). The Italian Treasury today sold 3-y (3 bln), 7-y (4 bln) and 20-y (2 bln) bonds at record low levels of respectively -0.33%, 0.18% and 1.14%, illustrating markets’ faith in the Mario Draghi’s attempt to form a stable government.
On the FX markets, the dollar is holding to recent losses even as sentiment on risk turned a bit more cautious. The TW dollar (DXY) is trading in the 90.29 area, with next support at 90.05 (Jan 21 correction low). EUR/USD touched a minor ST correction top just below 1.2150. Briefly, it looked that disappointing US jobless claims could trigger further USD losses, but the move stalled. EUR/USD is changing hands in the 1.2135 area. After a strong performance end last week and early this week, sterling today also lost some traction. EUR/GBP rebounded off the 0.8750 support area and currently trades in the 0.8780 area. Ongoing noise on the implementation of Brexit and its impact on the UK economy probably eased recent optimism on the UK currency.
News Headlines
The International Energy Agency published its February oil market report. World oil demand is set to grow by 5.4 mb/d in 2021 to reach 96.4 mb/d, recovering around 60% of the volume lost to the pandemic in 2020. However, the rebalancing act remains fragile. Oil demand is expected to fall by 1 mb/d in Q1 2021 from already low Q4 2020 levels, but a more favourable economic outlook underpins stronger demand in the second half of the year. With demand forecast to rise strongly in H2 2021 and still modest growth in non-OPEC supply expected, a rapid stock draw is anticipated during the second half of the year. That sets the stage for OPEC+ to start unwinding cuts even if producers outside the group do ramp up faster than currently projected. Brent crude continues to hover near $61/b.
The Financial Times reports that US banks are lobbying regulators to extend the reprieve to the supplemented leverage ratio (SLR) beyond March. The SLR is used to calculate the amount of common equity capital banks must hold relative to their total leverage exposure and is equal to 3% for large banks and 5% for systemically important institutions. The reprieve allows banks to exclude holdings of US Treasuries and cash kept at the central bank from their assets.
