Markets
The global reflation trade showed signs of a metamorphose last week. Interest rates and cyclical commodities continued their ascent. Equities and the dollar showed some hesitation. Eco data again were only a secondary factor to guide those developing trends. Friday’s EMU February PMI’s didn’t bring a major surprise. Strength in the manufacturing sector was still counterbalanced by a further contraction in services. From a market point of view, the rise in the price sub-indicators in the manufacturing sector and confidence on the outlook for the next 12 months rising to the highest level since March 2018 were the most relevant part of the narrative. The US PMI also showed strong growth prospects both for the manufacturing (58.5) and the services (58.9) sector. This positive forward-looking narrative reinforced repositioning on bond markets. The US yield curve steepened further with yields rising up to 5.2 bp (30-y). Interestingly , the rise now is driven by a sharp acceleration in real yields (10-y + 6.9 bp). Despite Europe lagging on the path to normalization, German yields joined the broader move with yields rising between 0.7bp (2-y) and 5.6 bp (30-y). The German 10-y yield (-0.30%) closed the week north of the -0.34% resistance. Equities were mixedas investors ponder the impact of rising interest rate volatility on other markets. European equities gained about 0.75%/1.0% on average. US indices closed little changed. The dollar still show no clear trend, despite the sharp rise in real US yields. The TW DXY index closed at 90.36 (from 90.59). EUR/USD also regained the 1.21 handle (close 1.2119) but stays within ST ranges. Sterling remained well bid on mixed UK data (poor January retail sales, but better than expected PMI’s). EUR/GBP closed the week at 0.8650, below the 0.8671 support.
Last week’s trends continue this morning. On the commodity markets, copper is exponent of an expected supply demand imbalance, jumping above the $9000 p/ton. On regional interest rate markets, Australia’s 10-y yield jumped 16bp to 1.60% despite RBA QE buying. The 3-y yield (0.127%) drifted above the RBA 0.1% target. US yields also opened substantially higher (+5bp for 10-y). Asian equities show a mixed picture with China underperforming (CSI 300 -2.75%). The dollar still shows no clear trend with EUR/USD at 1.2120 and USD/JPY slightly higher (105.65). Today, the German Ifo mainly should confirm the PMI’s. Tomorrow, markets will keep a close eye at Fed Powell’s testimony before Congress. He will probably confirm the Fed supportive stance but markets will look out for comments on recent market developments. Later this week, the process of approving the $1900bln US stimulus package will continue. The focus for global trading remains on the repositioning (or should we already call it a mini-crash?) on the bond markets. The break out of the gradual uptrend channel in US 10-y yield confirms the strong uptrend. The February 2020 top stance at 1.682%. The rise in US real yields probably will help to put a floor for the dollar with EUR/USD 1.2169/90 tough short-term resistance. For sterling, we look out whether UK PM Johnson’s roadmap to end the lookdown will support further sterling gains. EUR/GBP 0.8621 is next reference on the charts.
News Headlines
Rating agency S&P upgraded New Zealand’s credit rating from AA to AA+ (stable outlook). The country is recovering more quickly than most advanced economies from the COVID-19 crisis. Monetary flexibility, a wealthy economy and institutions are conclusive to swift and decisive policy actions and offset the country’s external imbalances. Credit metrics can handle a possible blow from negative economic shock including a potential weakening of the real estate market. S&P’s rating is in between the one from Fitch (AA) and Moody’s (Aaa). NZD/USD briefly set a recovery top above 0.73, the highest level since April 2018.
UK PM Johnson will today announce a cautious roadmap for ending the coronavirus lockdown. Four criteria will determine the speed of the reopening: vaccine enrollment, proof that vaccines reduce hospital admissions and deaths, work load of the NHS and risk assessment around COVID-variants. March 8 would kick off the process with all pupils returning to class, a resumption of outdoors sports and activity for children and 1v1 adult meetings in public spaces among the measures. From March 29, the latter would be extended to 6 people or two households with outdoor adult sports also back in play.
