Markets
Main European equity indices bounced off necklines of double top formations yesterday (eg EuroStoxx 3935), indicating that any corrections lower remain short-lived at least for now. A return to recovery highs is necessary to confirm this pattern. The move was partly a catch-up move with the US which finished well off the intraday lows on Tuesday after a final sprint higher. US stock markets seemed to confirm the better risk attitude compared to the start of the week, being well underway to finish the day somewhat higher. However, US President Biden’s top trade adviser Tai decided otherwise. She said that the US administration would work together with the WTO to allow for a temporary suspension of intellectual property rights for Covid-19 vaccines. A late sell-off in pharmaceuticals weighed on sentiment with US equities closing between +0.3% (Dow) and -0.4% (Nasdaq). Better risk sentiment for most of yesterday’s session didn’t really impact FX and FI trading. Nor did below-consensus, but still very strong US eco data (ADP employment; non-manufacturing ISM). The trade-weighted dollar is treating water just below first resistance around 91.36. EUR/USD hovers just above the 1.20 big figure. US yields shed 0.8 bps (2-yr) to 2.8 bps (7-yr) in a daily perspective with the belly of the curve outperforming the wings. The German yield curve bear steepened with yields rising by 0.3 bps (2-yr) to 1.6 bps (30-yr). 10-yr yield spread changes vs Germany barely changed with Greece outperforming (-4 bps) and Italy underperforming (+3 bps). US Treasuries’ outperformance could be partly related to the Treasury keeping refunding volumes stable in the next quarter and partly to the plea of Fed governors backing the official US central bank line after the dissenting view of Dallas Fed Kaplan (start tapering debate) and the slip of the tongue of Treasury Secretary Yellen (interest rates may have to rise). Boston Fed Rosengren thinks it’s premature to talk about tapering as a lot of slack remains in the US labour market while the temporary inflation rise won’t persist into 2022. He did specify that once tapering starts, the mortgage market probably doesn’t need as much support as the Treasury market. So the reduction of MBS purchases (currently $40bn/month vs $80bn/month US Treasuries) could go faster. Fed Vice-chair Clarida amongst other things stressed that the Fed’s bond-buying is providing important economic support and doesn’t see a risk of overheating. Cleveland Fed Mester said that she doesn’t think the increase in inflation is the type of sustainable increase needed to meet the forward guidance on policy rates. Chicago Fed Evans also isn’t in a hurry to talk about tapering. Fed governor Bowman hinted at an upward revision of growth forecasts in June, but not so much to the inflation outlook, labeling the risk of inflation running persistently above the 2% target as small.
Risk sentiment remains key for trading today, but it will also be a big day for sterling. An upbeat monetary policy report and consequently hawkish BoE hangs in the balance with a resonating SNP-victory in Scottish parliamentary elections which is seen as a proxy for a referendum to join the EU. The former will prime medium-to-long-term, providing the UK currency sooner with interest rate support, while the latter can trigger some short-term volatility.
News headlines
Brazil’s central bank (BCB) raised its Selic rate by 75 bps to 3.5%, turning recent communication into action. It also stated that a similar move is likely at the June meeting. This “partial normalization” would bring the policy rate back to its pre-pandemic level but still below its 6-7% neutral level. The BCB struck a more hawkish tone, referring to growth optimism, gradually reducing uncertainty and underlying inflation still expected “at the top of the range compatible with meeting the [3.5-3.75%, +/- 1.5ppt] inflation target”. It expects inflation to be near target in 2022.
China’s state economic planner said the country will “indefinitely” suspend all activity under a China-Australia Strategic Economic Dialogue, citing a “Cold War mindset” and ideological discrimination. Under the agreement, China and Australia held only three rounds of talks since 2014 and haven’t convened since September 2017, making the suspension largely symbolic to growing frustration between the two.
