Markets
Investors have been weighing the economic and financial pro’s (US stimulus, vaccination campaign) and cons (virus mutations and vaccine efficacity, possible extension of lockdowns) all week. For today, the scale initially tipped in favour of the latter. European traders started the final trading day with caution, sending EMU stocks lower at the opening but found a bottom fairly quickly in a rather uneventful close of the week. Indices are currently trending higher. The EuroStoxx50 even temporarily set a new recovery high just shy of 3700. Wall Street kicks off slightly in the red, led by tech. Core bonds were traded according to the classic risk correlation. US yields shrugged off early losses to trade 3 bps (10-yr) to 4.3 bps (30-yr) higher. Both the 10-yr and 30-yr trade close to their recent (recovery) highs of 1.20% and 2% respectively. German Bunds underperform USTs, advancing 2 bp (5-yr) to 5 bps (30-yr). Peripheral spreads are mixed with Spain and Portugal marginally widening (+1bp) but Italy (-1bp) and Greece (-3bps) narrowing the gap. Since former ECB chief Draghi was tapped to lead a new Italian government, spreads have narrowed about 25bps, significantly outperforming peers.
The greenback took the lead on currency markets today, posting its first gain of the week. The move comes despite a gradual improving of risk sentiment. EUR/USD held stable during Asian dealings but soon came under pressure. The pair tested 1.21 several times but succumbed to gravity as early US investors started joining the market (EUR/USD at 1.2085 at the time of writing). EUR/USD 1.2064 should hold going into the weekend for the technical picture not to deteriorate. The trade-weighted index took out resistance at 90.52 to trade at 90.69. USD/JPY is again trading north of 105. The British currency loses against the dollar but strikes back at the euro after yesterday’s setback. EUR/GBP tested the upper bound of the short-term downward trend channel near 0.88 but reversed course in the wake of better-than-expected UK Q4 growth. At EUR/GBP 0.8757, the pair is coming closer to support at 0.8747.
News Headlines
The Bank of Russia left its policy rate as expected unchanged at 4.25%. However, the Bank took a more hawkish stance. Governor Elvira Nabiullina indicated that the potential of monetary easing was exhausted. Sanction risks clouded the outlook for the ruble and for inflation. Even so, the bank said that it will consider the timeline and the pace of a return to neutral monetary policy. January inflation printed at 5.2%, above the 4% inflation target. The Bank raised the end 2021 inflation forecast to 3.7%/4.2%. 2021 GDP growth was seen at 3-4%. After a rebound since early February, the ruble today didn’t profit from the change in CB guidance. USD/RUB is trading in the 74.20 area.
Headline inflation in Hungary in January rose 0.9% M/M, leaving the Y/Y measure unchanged at 2.7% Y/Y. However, core inflation rose from 4.0% to 4.2%, mainly driven by prices of alcohol and tobacco products due to a rise in excise taxes. (Headline) Inflation is expected to rise further in the coming months. The forint weakened slightly today as no immediate change in the NBH policy stance is expected. EUR/HUR returned to the 359 area.
Czech January inflation surprised on the upside. CPI inflation rose 1.3% M/M and 2.2% Y/Y (from 2.3%). Due to a negative base effect, a more pronounced decline was expected. The upward surprise in monthly inflation was mainly driven by higher food prices. If confirmed, the higher inflation data might support the case for the CNB to hike rates sooner rather than later. At least today, the Czech krona didn’t gain further after a recent CZK upleg. EUR/CZK hovered in the 25.70 area.
