Markets
Reflationary dynamics that dominated trading at the end of last week and yesterday continued in Asia this morning – with the Nikkei closing the session at the strongest level since August 1990 – but stalled in Europe. European equities currently mostly trade marginally lower. For now it looks like a stabilization near recent peak levels rather than a correction. Other parts of the reflation complex (e.g. copper) simply continued their recent ascent. The rise in European/yields initially also slowed. However, otherwise ignored secondary data (slight upward revision of EMU Q4 GDP and better than expected ZEW expectations) proved sufficient to cause some renewed nervousness on European interest rate markets. The German 10y yield (intraday top -0.355%) is near key the -0.34% resistance (61% retracement March top/November low). German yields currently rise by up to 2.0 bps (30-y), continuing the steepening trend. 10y intra-EMU spreads versus Germany hardly changed. The underlying risk sentiment and market faith in ECB presence still perfectly counterbalance the potential negative impact from higher yields on spreads. The Italian blockbuster 10y syndication (record €110bn demand) proves this with new PM Draghi’s presence adding credibility. US markets evidently had some catching up to do after yesterday’s Presidents’ Day. US eco date were few, but the Empire State manufacturing index perfectly confirmed the reflationary narrative. The headline index jumped from 3.5 to 12.1 (6.0 expected). The subseries of prices paid for materials and prices received both touched the highest levels since May 2011. Most subseries on activity including new orders, unfilled orders and the number of employees also improved from previous month. US equity indices opened at new record levels (+0.3%). The US curve extends the steepening trend with yields rising between 0.5 bps (2y) and 6 bps (30y). The US 10y yield almost touched the 1.27% resistance (peak of March corona liquidity driven bond market sell-off).
The dollar again doubts on how to react to higher interest rate support on the one hand and the broader reflation trend on the other hand. EUR/USD tried an upside test this morning in Europe (intraday top near 1.2169), but the dollar received quite an aggressive bid early in US dealings. EUR/USD currently again trades in the low 1.21 area. A similar intraday rebound was visible in USD/JPY. At 105.7, the pair is near the February 5 correction top. EUR/JPY confirmed yesterday technical break and is testing the 128 big figure. For now, the yen is the weakest link amongst FX majors. EUR/GBP declined further to low 0.87 area. The LT yield gap between the UK and EMU continues to widen. Even so, sterling’s rise maybe showing tentative signs of slowing. Cable (currently 1.3890) at least failed to hold on to earlier gains. EUR/GBP 0.8670 remains the next line in the sand.
News Headlines
Hungarian growth for the fourth quarter of last year came in at a better-than-expected 1.1% q/q (vs. -0.5% expected). On a yearly basis, GDP is still 3.7% lower compared to the same period in 2019 (-5.6% expected). The Hungarian statistical office pointed out that industry as well as information and communication were the main drivers of the unexpected growth increase. The Hungarian forint is losing ground today along with other CE peers, mainly as a result of a less buoyant risk environment. EUR/HUF trades at 359.17.
The court in The Hague ruled the curfew imposed in the Netherlands lacked proper legal basis. The government failed to make clear why it was necessary to use emergency powers at this stage of the pandemic. While the court decision does not automatically end the curfew, the police said it would abide by the ruling, thus leaving the measure without law enforcement. After being introduced on Jan 23, the measure triggered riots for several days.
