Markets
Markets show a diffuse picture today. Equities are off their recente peaks, but the correction remains modest given the sharp upswing since early February. European indices shed 0.25%-0.50%; their US counterparts 0.75% (S&P and Dow) to 1.15% (Nasdaq). For now, it still looks like a correction rather than a reversal. Cyclical commodities including oil, copper and iron ore continue their uptrend. Mixed US eco data came nowhere near yesterday’s stellar numbers and hardly triggered intraday price action. US weekly jobless claims jumped to 861k (773k expected) with a significant upward revision to last week’s data. They comfort the Fed’s view that especially the labour market recovery will be a long drawn-out process , justifying an accommodative monetary policy for longer. The Philly Fed Business Outlook eased from 26.5 to 23.1 (20 expected). Details showed that prices paid and indicators on future inflation remain upwardly oriented. US yields ignored the data and continued their intraday rise. The US yield curve bear steepened with yields rising 0.8 bps (2y) to 6 bps(30y). The US 10y (1.305%) and 30y (2.085%) yields are again within reach of their recent peaks. Despite the mild risk-off, the German yield curve copied the bear steepening move with yields adding 1.2bps to 3.75bps. January ECB Minutes reiterated the need to maintain favourable financing conditions, but the central bank wasn’t concerned about a modest rise in nominal yields as long as real yields stay low. The ECB did reiterate its concern on the negative impact on financing conditions and on inflation from unwarranted euro strength. 10y intra-EMU spreads vs. Germany are widening by up to 3.bps with Italy slightly underperforming after the recent protracted Draghi-driven spread tightening.
On the FX markets, the dollar reversed most of yesterday’s gains that were, at least partially, inspired by strong US eco data at that time. Higher US yields combined with a less positive risk sentiment this time didn’t cause a sustained bid for the dollar. The US currency is still looking of a new narrative. EUR/USD even rebounded from the 1.2040 area this morning to currently trade in the 1.2075 area. USD/JPY also doesn’t profit from the rise in core yields. The pair hovers in the 105.75 area. Sterling again outperforms today. EUR/GBP broke below the 0.8671 support (currently 0.8655). The move was supported by a further widening of LT GBP interest rates/differential versus the likes of Europe or even the US. In a webinar, BoE’s Saunders warned that strong UK GDP growth still could leave unemployment at relatively high levels. At least today, this assessment didn’t change the repositioning toward higher UK yields and a stronger pound.
News Headlines
The ECB published its financial statements for 2020. The central bank’s profit was €1.64bn, down from a record €2.37bn last year. This was mainly due to lower net interest income on foreign reserve assets (USD decline) and on securities held for monetary policy purposes (redemptions in SMP-programme). The ECB’s profit is distributed to the euro area national central banks. The consolidated balance sheet of the Eurosystem grew from €4671bn to €6979bn due to an increase in refinancing operations ( TLTRO III) and asset purchase programmes PEPP & APP.
The Turkish central bank kept its policy rate as expected unchanged at 17%. Governor Agbal repeated the CRBT’s pledge to keep policy tight and create a strong disinflationary effect until inflation declines towards the 5% policy target in the next three years. In the meantime, additional monetary tightening will be delivered if necessary. The Turkish lira holds to recent gain and trades at the strongest level against the euro since last summer (EUR/TRY 8.40).
