Markets
It was smooth sailing on global markets this morning even as investors faced a key Fed policy meeting tomorrow. Europe followed a constructive mood from Asia ignoring the pause in vaccinations with the AstraZeneca shot in multiple countries, potentially complicating the pace the vaccination campaign and thus the return to some kind of normality. Still European equities are holding on to gains of 0.25%/1.0%. A mild further decline in core (US/German) yields brought additional calm to markets that were spooked by sharp swings in interest rates last week. German ZEW investor confidence (expectations) improved further from 71.2 to 76.6. US February retail sales declined 3% M/M. However, there were good reasons to expect this decline to be temporary (extreme weather, delays in tax refunds). On the other hand, the January boost for sales from first stimulus package, was even bigger than expected (upward revision from 5.3% M/M to 7.6%). And there is probably more to come after the approval of the $1900 bln stimulus bill last week. US February industrial production showed a similar, bigger than expected setback (-3.1% M/M). Still, it doesn’t ’t change markets’ assessment on a strong economic rebound. That probably also applies to the Fed’s assessment as FOMC meets. One hour after the open US equities are trading little changed (Dow) to 1.0% higher (Nasdaq). US bond markets are an area of remarkable calm with yields in declining less than 1.5bp. Markets apparently have confidence that Powell’s balancing act between economic optimism on the one hand and justifying further ample stimulus might succeed. A $24 bln 20-y US Treasury auction later today still is a potential interim hurdle. German yields also decline up to 1.5 bp (30-y). ECB’s Lane in an FT interview reiterated that the ECB wants prevent the yield curve to move ahead of the economy. The ECB strategy succeeds keeping the 10-y German yield close to the -0.38%/-0.34% support area (currently -0.35%). The EMU 10-y swap yield hovers near the 0% pivot. Despite an overall calm interest rate environment, intra-EMU spreads versus Germany widened marginally with Greece (+6bp) and Italy (+3bp) underperforming. According to an announcement Greece is preparing a 30-y bond sale in the near future. In Belgium, the Flemish Community also mandated a EUR-denominated Sustainability benchmark fixed rate transaction with a maturity of 25-year expected to be launched in the near future.
In the FX market, EUR/USD initially profited over the overall mild/low volatility  environment. However, an intraday rebound to the mid 1.19 area evaporated as US traders joined the fray. The pair currently even struggles to hold north of 1.19. There was no unequivocal USD strength. USD/JPY dropped back to the 108.85 area. EUR/GBP developed a similar pattern to EUR/USD, suggesting broader underlying euro weakness. EUR/GBP returned from a intraday peak near 0.864 to currently again trade in the 0.8575 area.
News Headlines
According to several Reuters sources, at least one Chinese state-owned bank is conducting huge amounts of one-year dollar-yuan swaps, alongside its purchases of dollar from exporters and corporate clients. The sources suspect the moves to be part of efforts to cap the yuan strengthening as domestic banks deal with a heavy dollar instream because of booming Chinese exports. After an impressive winning streak over the course of 2020, the Chinese yuan has been trading rather stable within a narrow USD/CNY 6.43/6.51 trading range in 2021.
During an open hearing before parliament, the Swedish central bank governor Ingves explained the central bank’s approach for preventing the health crisis to become a financial one. He added that given the uncertainty, monetary policy will remain expansionary for quite some time, expecting a “zero repo rate in the years ahead”. Ingves doesn’t see a period of inflation above the 2% target as a problem as long inflation expectations remain anchored. He expects to use the entire SEK700bn envelope and would go for a mix of more QE and a rate cut if more easing was needed.
