Markets
Some ‘constructive calm’ returned to European markets today. Asian markets took a more nervous start as a top Chinese banking regulator this morning warned on risks for bubbles in the global financial system. However, European investors didn’t feel addressed by this warning. European equities soon reversed opening losses. Eco data were few and had no lasting impact on trading. German unemployment rose by an, albeit modest, 10k. EMU inflation, after last month’s big upward surprise, printed exactly as expected (0.2% M/M, 0.9% Y/Y, core 1.1% Y/Y from 1.4% Y/Y). Even so the data might ease recent fear for an acceleration in inflation as indicated by other survey evidence. There were also tentative signs that parts of the market have returned to a more neutral positioning after the recent setback and that there is again room for a gradual restart of the reflation narrative. In the commodity complex, the likes of copper and oil are looking for a ST bottom. European equities reversed opening losses to currently gain 0.25%-0.5%. US indices open slightly lower (losses of 0.15% to 0.6% (Nasdaq)) which still isn’t that bad given yesterday’s steep rally. The US yields are rising modestly, gaining between 0.6 bps (2-y) and 1.75 bps (30-y). German bund yields show tentative signs of bottoming after with yields rising between 0.2bps (2-y) and 2.5 bps (10-y). For now the German 10-y is holding north of the 0.34% reference (62% retracement LT correction) despite several ECB members recently warning that they still have ammunition to counter an unwarranted rise in. Intra-EMU government bond spreads were little changed with Italy slightly underperforming. This Italian underperformance maybe was due to press reports that the new Italian government might need to take additional fiscal stimulus to address recent developments in the pandemic. The €32 bn envelope which was approved in January might be exhausted sooner than expected.
Trading in the major dollar/FX cross rates again showed no clear trend today. The dollar initially extended recent gains on market volatility in Asian this morning but reversed course as sentiment improved throughout the European trading session. The DXY TW USD index is trading little changed just north of 91.00. EUR/USD tested the 1.20 big figure, but no sustained break occurred. The pair trades little changed in the 1.2040 area. The yen still underperforms with USD/JPY setting a new correction top in the high 106 area (currently 106.85). The February sterling rally shifted into a lower gear. The rise in UK (LT) yields halted. Gilts today even slightly outperform Bunds and Treasuries. EUR/GBP has entered a ST consolidation pattern between 0.8541 and 0.8731 as markets await Finance Minister Sunak’s budget. Tentative signs that the UK government might gradually give some more weight to budget consolidation might ease the recent rise in yields and cap further sterling gains. EUR/GBP is trading little changed in a daily perspective (0.8650 area).
News Headlines
The Fed is stepping up scrutiny of US bank’s effort to end their reliance on Libor and started asking for more detailed evidence on their progress, people familiar said. The Fed is inquiring banks about their Libor exposure, plans for amending existing contracts and fallback provisions in a move that is seen as a prelude to more concrete supervisory action. In less than a year, the US central bank will stop allowing contracts that are pegged to Libor.
The Canadian economy grew 9.6% q/q annualized in the final quarter of last year, beating 7.3% market expectations. The figure followed an impressive 40.6% rebound from the pandemic related slump in Q2. The largest contribution to growth came from inventories (7.25 ppt). Net exports subtracted 1.84 ppt while gross fixed capital formation added 2.24 ppt. Household consumption weighed on the figure with -0.26 ppt. For all of 2020, Canadian GDP shrank 5.4%, the steepest annual decline on record. The Canadian loonie trades muted north of USD/CAD 1.26.
