Markets
European investors made an abrupt end to the reflation vibe which was still active during Asian dealings. Core bonds fell prey to some short covering after yields (the mirror image) set fresh recovery highs on a global level. ECB Lagarde (see below) gave an additional boost. German Bunds outperform US Treasuries. The German yield curve bull flattens with yields shedding 0.8 bps (2-yr) to 5.3 bps (30-yr). 10-yr yield spread changes vs Germany are broadly unchanged with Greece underperforming (+5 bps). Changes on the US yield curve range between -0.6 bps (30-yr) and +0.7 bps (3-yr).
The eco calendar was confined to German Ifo investor sentiment. The headline reading unexpectedly improved from 90.1 to 92.4 in February, with both the current assessment (90.6 from 89.2) and forward looking expectations (94.2 from 91.5) contributing. In lockstep with last week’s PMI’s, Ifo reported a jump in manufacturing to the highest since November 2018. Business expectations in the services sector turn less pessimistic with hospitality showing cautious optimism for the coming vacation season. Markets ignored the release. ECB Lagarde is currently talking in a hearing before EU parliament. She significantly added to the short covering on European bond markets by saying that the ECB closely monitors longer-term nominal bond yields. For some it could add to the argument that the ECB in a next phase – if necessary – could add a curve control element to its massive bond buying programmes. Mainly because of the disintegrated/national character of the EU bond markets, we fear that such policy would be difficult to implement. Targeting specific a yield spread for specific countries might on top be difficult to defend (politically). Anyway, just as the ECB reverted to verbal interventions against a too strong euro, they now turn their tongue against the bond market. Such verbal interventions often work at first, but they rapidly lose power/impact and risk turning against you if you can’t put your money where your mouth is. Lagarde’s comments capped the gentle intraday rise of EUR/USD from 1.21 to 1.2150 while helping European stock markets recovering from steep opening losses. The balance currently reads -0.50%. UK investors wait for more insights on UK Johnson’s plan to reverse lockdown measures which he’ll present to parliament today. EUR/GBP is going nowhere near 0.8650.
News Headlines
UK shopper numbers in the week up to February 20 increased by 6.8% vs. the previous week, Reuters reported quoting Springboard. It is the fifth week straight that footfall rose despite the lockdown still in place. Springboard director Wehrle said the data showed evidence of pent-up demand and indicated a surge back to stores when non-essential retail is allowed to reopen. Shopper numbers compared to the same week last year are still 62% lower however while Friday’s January retail sales show that increased footfall need not lead to increased spending.
The EU will sanction four Russians over the poisoning of Navalny, people familiar with the matter said. EU foreign ministers gave the green light today to apply the restrictive measures which mark a new low in relations between the EU and Russia. The economic impact will remain limited however, not to close all doors to resolve the matter. The Russian rubble loses ground today with EUR/RUB jumping beyond 90 again in a move also driven by risk-off.
US president Biden will launch some changes to the forgivable Paycheck Protection Program (PPP) in an attempt to reach smaller companies including sole proprietors. The Small Business Administration will only accept applications for loans from firms with fewer than 20 employees for two weeks straight starting from Wednesday. The PPP still has some $150bn of unused funds left after being re-launched in January with $284bn in new funds from the aid bill passed end of last year.
