Markets
Friday’s price action saw a repeat yesterday with reflation dynamics pulling the strings in absence of US investors (Presidents’ Day). Bear steepening of yield curves is currently the proponent of that trade. German yields added 1.3 bps to 4.6 bps (10-yr). The German 10-yr yield tested the August top at -0.38%. The 30-yr yield waved goodbye to similar resistance (0.1%) and trades at the highest level since June. UK Gilts underperformed German Bunds with UK yield adding up to 6.7 bps. Markets respond to the UK’s competitive advantage gained through a different vaccination strategy with UK PM Johnson readying a roadmap out of the current lockdown. Earliest dates to free pockets of society/the economy from restricting measures would be announced in the near term. Johnson didn’t want people to become overly optimistic by not guaranteeing the ability to take holidays over Easter (Apr 4). Sterling was the best amongst FX majors with EUR/GBP near the 0.87 big figure and drifting towards 0.8671 support. GBP/USD set a recovery high north of 1.39. UK stock markets (FTSE +2.5%) outperformed continental Europe (>1%). A strong weighting for financials (steeper curve) and commodity-related stocks added to positive UK news flow. Nearly every corner of the commodity markets remains in rallying mode. The arctic blaze over the US Mid-West contributed to higher oil and especially gas prices, both through constraint supply and increased demand. Several soft commodities and metals trade at multiyear highs. Commodity-related currencies shine. EUR/NOK fell below 10.20 yesterday for the first time since March. USD/CAD is near the year-to-date low of 1.26, matching the strongest CAD-level since 2018. AUD/USD performs a similar trick at 0.78.
The (stock market) party continues in Asia this morning with Japan winning up to 1%. Commodity markets are losing some vigor with the Bund and US Note future off yesterday’s weakest intraday levels. The dollar managed to hold up well yesterday, but underperforms somewhat this morning. From a technical point of view, EUR/USD has difficulties to take out minor intermediate 1.2151 resistance (50% retracement of 2021 decline) with the trade weighted dollar remaining above more important support at 90.13 (62% retracement of that same move). Today’s eco calendar remains poorly filled apart from German ZEW investor sentiment (February) and the US Empire Manufacturing survey (February). Reflation dynamics continue dominating trading, but this morning’s price action suggest slowing momentum compared to Friday and Monday.
News Headlines
The share of companies rated triple C or below in total junk-bond sales has grown to the highest since 2007 in yet another sign investors are hunting down the rating ladder for yield. FT calculations show that about 15% of junk-bond deals took place in the most riskiest part of the debt market, based on S&P ratings. That figure rises to 21% according to Moody’s bond reviewing. The investor stampede on those bonds has pushed its yield to record lows in recent weeks.
The European Commission will issue guidance to governments in the spring on when it thinks the budget rules should be observed again. The Stability and Growth Pact rules that limit borrowing to ensure public finance health, were lifted last year to help weather the pandemic. European Commissioner for Economic and Financial Affairs Gentiloni told any withdrawal of the support measures in any case would have to be carefully managed to avoid a sharp rise in bankruptcies.
BoJ Governor Kuroda said the recent stock market rally reflects market optimism about the economy going forward and the vaccine rollouts. He added that it was premature to debate an exit from the easy policy that includes ETF purchases. His comments came after growing unease with some lawmakers that the very loose monetary policy is fueling asset price bubbles, especially at a time when Japanese stock indices are setting multidecade highs.
