Markets
Calm returned after last week’s wild swings on bond markets that spilled over to risky assets as well. The VIX volatility index retreated further from a minor spike somewhere around 29 to 25 today. Market sentiment is optimistic at the start of the new month with European stock markets racing 1-1.5% higher. US markets open with similar gains. German inflation stabilized at 1.6% in February (0.6% m/m) after the January surge amid ongoing support from fuel, gas and food prices. Being close to expectations, the market impact was limited. German Bunds are well bid, mostly in a catch-up move with UST’s in a rally after European trading hours on Friday. Yield changes vary from -2.4 bps (-2yr) to -6.6 bps (10-yr, -0.33%). First support in the German 10y yield situates at -0.342%. Peripheral spreads tighten slightly. Greece (-2 bps) outperforms. The European 10y swap rate tries to hold north of the recently recaptured 0%. USTs trade according the risk dynamics. Yields recoup some of Friday’s losses with the 30-yr variant advancing 5.2 bps (vs. 12 bps lost end of last week). The 10-yr (+2.6 bps) tested key resistance near 1.44% but the leap higher lacks strong legs, even as the US manufacturing ISM came in stronger than expected (cf. headline below).
The dollar traded unconvincingly during Asian dealings but performed a tad better during European dealings even though risk sentiment isn’t playing in favour of the greenback. But US/European yield differences, although mainly technical in nature, provide enough of a counterweight. EUR/USD’s early attempt to recoup 1.21 (and thus the short term upward trend channel) failed miserably. The pair is testing support near the 1.204 area, supported by the ISM release. DXY is settling north of the 91 big figure after gravity failed to lure the trade-weighted greenback back into the February downward trend channel. USD/JPY is trading silently at around 106.6. EUR/GBP also staged a poor attempt to win back some of Friday’s losses. EUR/GBP gapped open near 0.87 after UK finance minister Sunak hinted at corporate tax increases to fill the enormous budget deficit post corona. Lacking enough dash, the move quickly reversed. The currency pair even remains south of the 0.868 resistance area, filling bids at 0.865. Overall dollar resilience prevented cable from regaining 1.40.
News Headlines
ECB data showed that they didn’t really step up bond purchases to counter last week’s mini bond crash. Cumulative PEPP holdings stood at €866.67bn on February 26 (+ €12bn from February 19), compared with €810.21bn at the end of January. The monthly pace (ex final two trading days) of €56.5bn closely resemble the €53bn PEPP-purchases made in the first month of the year.
The February US manufacturing ISM unexpectedly increased from 58.7 to 60.8 (vs 58.9 expected). The outcome matches the highest reading since 2004. Details showed (input) price pressure (86) rising by the most since 2008 (preparing for demand pick-up & supply shortages). Orders, production and employment (highest in almost two years) all increased compared to last month with delivery times being the second longest since 1979.
