Markets
European and US equities yesterday balanced between hope and fear. Fears on a slower opening of the (European) economy due to new virus revival and a difficult start of the European vaccination process initially dominated trading. Sentiment gradually improved in US dealings, partially supported by president Biden pointing out that theUS is well ahead of schedule with its vaccination campaign. US equities closed with gains between 0.12% (Nasdaq) and 0.62% (Dow). Data had limited impact on trading. US jobless claims printed at a better than expected 684K, but the release was distorted by corrections. US yields followed the intraday reversal of equities. 5 & 10 y rose 2.7bp/2.5bp. The 30-y even jumped 5.7bp. The reversal was not solely due to the change in global sentiment. The US Treasury 7-y auction was again very weak,awarded 2.5bp above the WI yield, causing additional bond selling. German Bunds strongly outperformed Treasuries as the prospect of economic normalization clearly lags. The Bund curve flattened with yields declining up to 3.5 bp (30-y). The dollar remained in good shape with the TW DXY index extending gains north of the 92.50 resistance. Even so, euro weakness was even more dominant. The euro even didn’t profit from the intraday equity rebound. EUR/USD closed at 1.1964, near the intraday low. Euro selling was also very visible in EUR/GBP, sliding from the 0.8640 area to finish at 0.8565. The UK easing some containment measures from Monday, potentially supported sentiment on sterling.
Yesterday’s WS rebound supports a solid risk-on start on Asian markets this morning,with gains of 1.5% in Japan and even 2.3% in China. For now, the risk rally doesn’t cause any further rise in US yields. The dollar maintains most of its recent gains (DXY at 92.75). USD/JPY (109.25) is even nearing its recent top at 109.36. EUR/USD regains marginal ground at 1.1780. USD/CNY is trading little changed at 6.5425, despite the strong equity rebound.
Today, sentiment on the (divergent) progress in the vaccination process might continue to set the tone for global trading. Eco data include German Ifo Business climate and the US PCE price deflators. An expected further improvement in IFO confidence, if it materializes, probably won’t change investors assessment on the slow reopening of the regional economy. US PCE inflation is still expected to remain modest at 1.5%/1.60% y/y. Base effects probably will only come in play over the next months. US LT yields show tentative signs of bottoming. However, European yields clearly are under heightened pressure. The 10-y EMU swap rate is at risk returning below the 0% barrier. The German 10-y yield is testing the -0.34/-0.38% technical barrier. A break could bring the correction back to the -0.42% area (mid -Feb gap). The euro is also fighting an uphill battle. A better risk sentiment in theory is a euro supportive in a daily perspective, but probably won’t change the broader trend. This week’s break below the EUR/USD 1.1836 correction low opened the way for a full retracement to the 1.1603/12 area. For EUR/GBP, a retest of the 0.8533 correction low might be on the cards.
News Headlines
The US Federal Reserve Board announced that the temporary and additional restrictions on bank holding company dividends and share repurchases imposed in the early days of the Covid-crisis will end for most firms after June 30, after completion of the current round of stress tests. A bank that falls below any of its minimum risk-based requirements in the stress test will remain subject to the additional restrictions for at least another three extra months, through September 30. Last week, the Fed board already decided to let another crisis measure, the temporary change to the supplement leverage ratio (SLR) expire by the end of the month.
In a landmark ruling, the Canadian Supreme Court upheld the government’s decision to impose a carbon price across the country. Oil-rich provinces argued that the carbon tax law (raising price to C$170 per metric ton by 2030) infringed on their jurisdiction. The court finds that global warming causes harm beyond provincial boundaries and that carbon pricing is a critical measure for the reduction of emissions. The ruling is a boost to PM Trudeau’s green agenda which committed the country to achieving net-zero greenhouse gas emissions by 2050.
