Market movers today
- Flash PMI for euro and US could very well weaken with the signs of a slowdown in the global manufacturing cycle in Chinese data and parts of the service sector taking a hit from lockdowns. We are in a short-term vacuum in the global economy before growth is set to recover once the vaccines have been fully rolled out in the US and Europe over the summer.
- US existing home sales is also due today.
The 60 second overview
Macro: Tier 2 US numbers showed some weakness yesterday. Weekly claims jumped to the highest level in four weeks, housing starts fell last months and the Philadelphia Fed manufacturing index slid to 23.1 in February from 26.5 in January.
Higher yields: Equity and credit markets are still focusing on the sell-off in global fixed income markets, where 10Y US treasury yields once again traded above 1.30% and 10y Bund yields rose to -0.35%. So far, the global central banks have been silenced about the rise in global yields probably attributing it to a better economic outlook, but as real rates have also started to edge higher this might be about to change. The move higher in especially US yields has been abrupt over the last month and might have been exaggerated by supply worries, positioning and convexity hedging. The latter is the effect from duration going up in the US mortgage market fuelling selling pressure in the US treasury market. We have the effect in the Danish mortgage bond market.
FI outlook: The trend higher in global yields is strongly supported by positive vaccine news, higher inflation expectations and fiscal easing. However, central banks are still dovish and we still need to see that re-opening in fact goes as smoothly as expected in financial markets. In Yield Outlook published this week, we argue that risk is still to the upside for US and European yields after the recent moves. But it might be more of a H2 story than a Q2 story.
COVID-19 Update: New cases, hospitalisations and deaths continue to decline in Europe and the US. The vaccination pace is increasing but Europe is still lagging Israel, the UK and the US. EU has ordered more doses from Moderna and Pfizer. Johnson & Johnson has requested authorisation in the EU with EMA issuing an opinion in “the middle of March”. Johnson & Johnson is expected to get approval in the US next week (the US FDA meeting take places on Friday 26 February so the actual approval is expected on Saturday 27 February). For more details see COVID-19: New cases moving lower globally, as more vaccine doses are set to speed up roll-out in Europe, 18 February.
Norway annual address: As expected, Norges Bank governor Olsen’s annual address last night contained no new monetary policy signals. The speech repeated the message from the latest MPC-meetings that rates will be on hold until the economy ‘normalises’, and that the possibility of further cuts is very small. No news, we still expect rates to be hiked in September if the current vaccination plan can be kept.
Equities: Wednesday’s session was another small retreat from previous week’s gains. US shares were mostly lower, with S&P down -0.4%, Dow -0.4%, Nasdaq -0.7% and Russell 2000 clearly underperforming down -1.7% (-3% for the week). Sector performance reversed, with defensives and consumer sectors the best and materials and energy among the laggards. Similarly, most risk-indicators deteriorated, with VIX a little higher and energy prices lower. The gloomy sentiment has spread to Asia overnight with most indices down roughly -1%. Futures are pointing downwards ahead of the US opening as well.
FI: After taking a short pause on Wednesday, the euro rates rose again yesterday led by the long end of the US curve. Bunds rose 2bp to -0.35% mostly in the afternoon. Contrary to previous trading sessions the intra-euro area spreads also widened as notably BTPs-Bund spread widened by 4bp, to almost stand at 100bp again (after touching 90bp on Friday last week). 10y Ireland is now back in positive territory. The sell-off in recent days is in our view mostly flow driven rather than changes to the underlying or expected fundamentals. Since the sell-off started last Friday, the Bund ASW has remained in a tight range.
FX: EUR/USD moved slightly higher yesterday but remains below 1.21. EUR/GBP moved below the (indicative) 30 April low of 0.8671 now trading at 0.8653. EUR/SEK did not move on yesterday’s inflation data but risk is tilted towards the upside today, as the Riksbank minutes may come across as dovish.
Credit: Along with other risk assets, credit markets were under pressure yesterday where iTraxx Xover widened to 249bp (+3½bp) and Main to 48bp (+½bp). HY bonds were broadly unchanged while IG was 1bp wider on average.
