Markets
There were no important data in the US or in Europe yesterday, but this didn’t prevent the ongoing repositioning to cause some significant moves. The developing reflation narrative ever more causes divergent moves across several parts of the markets. US Treasury yields remained upwardly oriented after the approval of the $1900 stimulus package in the US Senate this weekend. Remarkable, despite the Fed’s commitment to leave the policy rate unchanged for a long period to support inflation and maximal employment, the rise in yields also starts to affect US yields at shorter maturities, with the US 2-y and 5-y respectively rising 2.6bps and 5.5 bps. The rise in the 30-y at 1.8% shows further signs of easing after recent selloff. German yields also drifted higher, but at a distance with yields rising between 1 bp (2-y) and 2.5 bps (10-y). Net ECB PEPP bond buying in the week ending March 5, showed no indication yet of the ECB stepping up its efforts to cap the rise in long term yields, but ECB officials suggested that redemptions might have affected the pace of buying. The rise in US bond yields, also for ‘shorter’ maturities and persistent volatility especially on US equity markets further supported the dollar. After last week’s break below 1.1952, EUR/USD yesterday also closed below the 1.1888 support (62% retracement 1.1603/1.2349) at 1.1847. The trade-weighted dollar cleared the 91.60/75 resistance area. Sterling lost marginally against the dollar, but extended gains against the single currency with EUR/GBP closing at 0.8570. On equity markets, the rotation toward cyclicals and a stronger dollar, caused a striking outperformance of European equities (EuroStoxx50 + 2.55%, Dax +3.3%) over the US (Dow +0.97%, but S&P (-0.54%) and Nasdaq (-2.41%) correcting further).
The correction on Asian/Chinese equities slowed this morning after Chinese state backed funds reportedly intervened to bring back some stability after recent correction. Better sentiment in Asia also supports US equity futures. US Treasury yields decline a few bps. The picture for the dollar is a bit mixed. USD/JPY regained the 109 mark, the highest level since May last year. EUR/USD stabilizes in the 1.1860 area and so does USD/CNY (6.527 area).
Today’s eco calendar is again thin. US NFIB small business confidence is expected to improve from 95 to 97. The indicator is interesting as a pointer for the broadness of the recovery, but is seldom a market mover. US Treasury will start the mid-month refinancing operation with a sale of $ 58 bln 3 year notes. Until recently, available liquidity and expectations for the Fed to keep the policy rate low for long kept this part of the curve well protected (even with higher LT yields). Still we are interested to see investors’ interest after the recent yield rise also at shorter maturities. The EU is also expected to open orderbooks for the sale of a 15-y social bond. An easing of equity market volatility in theory might slow the dollar ascent. However, the technical picture for the US currency clearly improved of late. EUR/USD 1.18 is a next intermediate support after the break below the 1.1952/1.1888 area. For now, it remains too early to call an end to the ST USD uptrend. The EUR/GBP downtrend also remains in place, with the 0.8541 2021 correction low returning on the radar.
News Headlines
Former Brazilian President Lula’s convictions in a corruption probe was annulled by a Supreme Court Judge. The decision paves the way for a return to politics by the leftist icon who is remembered by lifting millions out of poverty but also for corruption and economic mismanagement. The next presidential elections are due in 2022 where Lula, if he returns, will be facing incumbent president Bolsonaro. The Brazilian real plummeted to levels not seen since the pandemic selloff (USD/BRL 5.82),which in turn were historic lows.
The Bank of France said the French economy will avoid a second recession in the first quarter of this year. The central bank said that a steadying of activity is enough to generate “slight growth” in the running quarter. Economic growth in Q4 2020 remained 5% below the same period a year earlier and will remain there through March, it estimates. Industry and construction likely improved while the services sector continues to lag.
