Markets
4k: check. The EuroStoxx 50 passes the psychologic 4000 mark for the first time since January 2008! Ever since taking out the 2015 & 2020 tops which coincided more or less with 76% retracement of the 2007-2009 sell-off (3900-area), this moment had been coming. Technically, the path to the all-time high at 4573 is “wide” open. The reflation pause and subsequent downward correction in core bond yields certainly helped in giving stock markets some fresh momentum. Main European indices record 0.5%-1% gains today, in line with WS’s performance yesterday. The S&P 500 and Dow Jones are already trading at all-time highs and the Nasdaq is again closing in on that reference.
US long term bond yields make a (so far) lackluster attempt to regain support levels lost yesterday. We’re talking about 1.6% for the US 10y yield and 2.3% for the US 30y yield. These levels gave way this week after well-digested US supply and following a sell-the-rumour, buy-the-fact reaction on better/higher US activity/inflation numbers. Rate markets seem to conclude that’s it’s too early to fight the Fed’s accommodating intentions right now. US yields add 0.5 bps to 2 bps today in a daily perspective with the belly of the curve slightly underperforming the wings. The German yield curve bear steepens with yields adding 0.5 bps (2-yr) to 2.2 bps (30-yr). Over the past two trading days, we gained the impression that the (long end of the) EU yield curves will be decisive in the next market move. European yields broke with US ones, ignoring the downward correction across the Atlantic. Instead, they have been slowly moving towards recovery highs and first resistance. One potential explanation is that European markets are ready for a vaccination/lockdown reversal catch-up move against for example the US or the UK. Earlier this week, we noticed a tentative bottoming out in German real yields. One thing that might currently be tempering enthusiasm is next week’s ECB policy meeting (Thursday) and a fresh batch PMI’s (Friday). However, we don’t see how their outcomes might be holding back rates. The ECB made its move last month around, with governors in the mean time stressing slowing down the purchase pace in H2. April eco data could start benefiting from less stringent measures. In FX space, EUR/USD keeps knocking on the EUR/USD 1.1990 but a break won’t happen until (higher) EU rates give the go-ahead. Similar dynamics are at play for EUR/GBP 0.87. The pair briefly pierced that level today, but failed to consolidate those gains.
News Headlines
ECB Governing Council member Villeroy said the EU debt rules should be revised and simplified rather than completely getting rid of them. He argued the 60% long-term debt ratio is still a useful anchor but the 3% deficit rule to get there over time “is too demanding” and should be more country-specific. He advocates a rule based on total government expenditure growth.
The US Treasury refrained from labelling any trading partner as a currency manipulator. Switzerland, Taiwan and Vietnam met all thresholds to be designated as such but the US said there was “insufficient evidence” to conclude all three of them had the intention of “preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade”. Meeting two of the three criteria, Ireland and Mexico were added to the watch list, next to others including China, India, Germany and Japan.
Poland will start to ratify the EU’s €750bn recovery fund only in early May, its PM Morawiecki announced today. The government is struggling to secure enough support for the plan after one of the junior coalition members refuses its backing, arguing it is “not in Poland’s best interest to co-sign liabilities for countries with weaker economies”. The leader of the Law & Justice Party (PiS) Kaczynski already warned that the three-way alliance could collapse unless it approves the EU deal. There are 10 countries that still need to ratify the fund before it becomes fully operational.
