Markets
Markets are finishing the week on a softer footing. A minor risk-off correction during Asian dealings continued going into European dealings. There were no economic data or events to guide trading otherwise. Stock markets gapped about 0.5% lower before extending losses to (more than) 1% after the Federal Reserve announced the temporary change to its supplementary leverage ratio (SLR) rule would expire on March 31. The SLR change was aimed at reducing liquidity strains in the Treasury market during the March/April 2020 turmoil and to increase bank’s ability to provide credit to households and businesses (see also below). The EuroStoxx50 retreated from yesterday’s highest closing since 2008. Wall Street trades lower as well. The Dow Jones (-0.8%) underperforms. US Treasury yields initially lost ground during the Asian risk-off, bottomed in European dealings before spiking on the Fed announcement shortly before the US open. US yields eventually rise 1 bps (5-yr) to 1.8 bps (10-yr vs. an earlier intraday decline of as much as 3.8 bps). The yield moves come after yesterday’s solid >6 bps gains for the belly of the curve. German yields slid into the European open but staged an intraday comeback relatively quickly. Yields still drop -2 bps (2-yr) to -2.6 bps (10-yr). Peripheral spread changes are negligible.
An attempt by EUR/USD to recover from yesterday failed soon. The reversal came in lockstep with US yields bottoming, which brought support for the greenback. The pair neared 1.194 before sliding sub 1.19 to 1.188 at the time of writing. The trade-weighted DXY takes out the 92 mark and is now testing resistance near 92.15. USD/JPY is trading indecisively near the 109 pivot. Sterling is having an off-day. There was no particular news from the UK front to tie the decline to. Quite the contrary; headlines showed the UK is edging closer to a limited Brexit finance deal with the EU. This suggests technical elements are at play. Sterling failed to push through resistance at EUR/GBP 0.855 and GBP/USD 1.40 for an umpteenth time. This triggered a countermove. GBP/USD declines more than a full big figure from an intraday high at 1.396 to 1.3833 currently. EUR/GBP is testing the upper bound of the downward trend channel (0.858/0.859).
News Headlines
The Russian central bank unexpectedly hiked its policy rate from 4.25% to 4.5%, joining central banks in Brazil and Turkey with a more hawkish policy twist than prognosed. Russian inflation (5.7% Y/Y) accelerated more than anticipated and could stay longer above the 4% inflation target. A weaker ruble, with the country possibly facing fresh international sanctions, adds to the tightening argument in this constellation. The Bank of Russia holds open the prospect of further increases in the key rate at its upcoming meetings. The ruble already strengthened in the run-up to the meeting with EUR/RUB declining towards 88. The move lacked follow-up action after the rate hike.
The US Federal Reserve will let the temporary change to its supplement leverage ratio (SLR) expire as scheduled on March 31, defying sectoral lobby for an extension. The SLR requires large banks to have capital equal to at least 3% of their assets, or 5% for the largest systemically important institutions. The US central bank temporarily modified the SLR last year to exclude US Treasury securities and central bank reserves. The Fed did say that it would soon propose some longer term changes to SLR because of the growth in the supply in central bank reserves and the issuance of Treasury securities.
