Markets
European markets gradually calmed Friday after the recent protracted rise in in core yields caused upticks in volatility. In the afternoon, US payrolls revived the dilemma for global markets. With 379K net job creation in February and an upward revision for the previous month, the report printed stronger than expected. There is still a lot of work to do to bring employment back to a pre-corona level but the strong payrolls still raised the question whether the US output gap could close faster than expected, possibly with a bigger inflation impact. This is a fortiori the case if the economy gets additional fiscal stimulus at a time when activity will get a boost from the reopening as the roll-out of vaccination accelerates. (US) yields and equities initially jumped nervously up and down, but finished in a constructive way. US yields were little changed, with the 30-y even easing 2.3bp. US equity investors saw the glass half full with indices rising 1.55% (Nasdaq) to 1.95% (S&P). European equities closed before the US rebound (-0.5% to -1.0%). German yields gained less than one bp. The strong payrolls gave the USD the benefit of the doubt. EUR/USD closed at 1.1915. The TW USD index (DXY) closed north of the 91.60, improving the ST picture for the USD. Sterling lost modest ground against a strong dollar (close 1.3832), but outperformed the euro (EUR/GBP 0.8612).
During the weekend, an ‘amended’ $1.9 trillion US Covid-19 relief bill was approved by the Senate and will get a second vote in the House, probably on Tuesday. China foreign trade data for the first to months of the year show a positive surprise in imports (+ 22.2%) and even more for exports (+60.6%), pointing at ongoing solid demand worldwide. Brent oil price jumped above $70 b/p (cf infra). Asian equities initially took a constructive start but optimism soon evaporated with Japanese, Korean and Chinese indices currently losing between 0.5% and 2.75% (CSI 300). US yields gain a few bps. The dollar remains will bid with EUR/USD nearing the 1.19 barrier and USD/JPY (108.40) holding last week’s gain. The yuan weakens to USD/CNY 6.51.
Today’s eco calendar is thin except for a speech of BoE’s Bailey on the economic outlook. Later this week, the OECD will publish its economic outlook (Tuesday). China and US CPI will be published on Wednesday. On Tuesday, the ECB will hold a regular policy meeting. Markets will look out whether/how the ECB will address the recent rise in LT yields. We keep a close eye at market acceptance of the US 3y, 10-y & 30-y refinancing scheduled for this week. The expected approval of the US stimulus and a further rise in oil prices probably will continue to support core yields. After clearing first important levels on the charts (EUR/USD below 1.1952; DXY 91.60), the ST technical picture for the US currency improved. The EUR/USD 1.1888 support might soon come under test. For sterling, question is how long the UK currency will be able to resist higher global volatility. 0.8541 remains next key reference for EUR/GBP.
News Headlines
St. Louis Fed President Bullard said he doesn’t think of a shift in policy, including moves like an Operation Twist, as an option right now to push back against the current higher yields. He argues there is a very strong outlook for the US economy with an already very easy monetary policy. Bullard sees inflation running above 2% by year-end and would be comfortable with it if it were 0.5% above target “for some time”. Atlanta Fed President Bostic voiced similar views, saying the monetary stance is appropriate and the economy and inflation is allowed to run hot.
Saudi Arabia’s world’s largest Ras Tanura export terminal, capable of exporting about 6.5 mln b/d, was attacked by drones and missiles on Sunday. The attack, claimed by Iran-backed Houthi rebels, was intercepted thus causing no damage to either the facility or crude production. Nevertheless, the move brought back memories to a similar 2019 assault that cut production for several days. Brent oil prices jump beyond $70/b this morning.
