Markets
From moderation to risk-off, that’s the change in narrative on global (bond) markets this week. End of last week and early this week, a pause in the sharp rise of long term yields provided breathing space to risky assets, especially ‘highly valued’ tech stocks. This feeling of relief eroded yesterday as uncertainty on the pace of the global recovery mounted. A rise in virus cases in Europe but also in Latin America is forcing governments to step up containment measures, raising questions on the recovery of global demand. Oil proves highly sensitive to this development and tumbled from $70 P/B levels less than two weeks ago, to trade in the $61 area currently. In a classic risk-off move, yields and equities this time declined simultaneously. US equities declined between (0.76%, S&P) and (1.12% Nasdaq). US yields lost 0.2 bp (2-y) to 7.4 bp (10-y). The moves were mainly due to a decline in real yields but inflation expectations also showed signs of topping. In this context, Fed Chair Powell’s analysis before Congress that any rise in ‘inflation will be neither particularly large nor persistent’ already sounded much more credible. German yields followed the broader trend and declined up to 3.4 bp (30-y). The risk-off narrative, rather than interest rate differentials also drove the FX price action. The dollar, and even slightly more the yen, outperformed. USD/JPY dropped to the 108.50 area. The TW dollar (DXY) rose from 91.81 to close at 92.34. EUR/USD (and EUR/JPY) were hit hard. EUR/USD closed at 1.1849. Sterling suffered slightly from global uncertainty. EUR/GBP rose to 0.8616.
The risk-off correction continues in Asia this morning with most indices (except for Australia) declining between 1% and 2.0%. Core US yields decline (modestly) further. The dollar and the yen remain in the driver’s seat (USD/JPY 108.50). EUR/USD (1.1845) nears the 1.1836 support. The yuan extends its gradual decline (USD/CNY 6.5240).
Today, the eco calendar is well filled with the preliminary EMU and US market PMI’s. For the EMU composite PMI a minor gain from 48.8 to 49.1 is expected. The market is probably growing more sensitive for a negative surprise (e.g. signs of further hesitation in the services sector). US PMI’s and durable goods orders are expected to rise further and might highlight the divergence in the pace of the recovery. After a successful 2-y auction, the US Treasury today will offer $61 bln in 5-y notes. The context for a good acceptance clearly improved this week. The risk-off this morning suggests that the correction in core yields might have some further to go. 1.47% is intermediate support for the 10-y US yield. The risk-off and a fragile EMU recovery narrative yesterday weighed heavily on the likes of EUR/USD and EUR/JPY. EUR/USD breaking below the 1.1836 low opens the way for a full retracement to 1.1612. EUR/GBP shows tentative signs of bottoming. First important technical resistance is coming in at 0.8731. A break won’t be that evident as long as the EMU recovery story remains as weak as it currently develops.
News Headlines
BoC Deputy Governor Gravelle said that the central bank will suspend its main short-term financing facility in May. The move will reduce the BoC’s balance sheet by about C$100 bn to near C$475bn. Asset purchase programmes for commercial paper, provincial bonds and corporate bonds won’t be extended, but the stock of purchases will remain steady. Gravelle didn’t give specific hints on the weekly purchases of C$4 bn federal government bonds, but the pace of purchases is generally expected to be slowed until the “reinvestment phase” (zero net purchases) in order not to interfere with market liquidity. The BoC already holds over 35% of outstanding government bonds.
The Hungarian central bank kept its monetary policy parameters unchanged yesterday. Inflation is likely to be volatile in coming months and will remain above the central bank’s target. The MNB confirmed its clear intention to prevent the current uncertain environment (HUF weakness?!) from causing a sustained rise in inflation and will be ready to use the appropriate instruments (eg 1 week depo rate hike) if necessary. EUR/HUF steadies near 366 after the meeting.
