Markets
European bonds and stocks sold off in lockstep from the European opening bell. It’s the kind of correlation we’re not really acquainted to, but which could become more common if the inflation bogeyman rattles financial markets. Today’s ECB financial stability review mentions “remarkable exuberance” in market segments. Moreover, the ECB warned that more upward US inflation surprises could prompt earlier tightening bets with higher bond yields and an equity market repricing (including spill-over to Europe) as a consequence. As long as the bond/stock sell-off proceeds gradually, the dollar remains in the soft spot. If the pace accelerates like today, the greenback cashes in on its so far untouchable safe haven status. Zooming in on the equity market shows European stock dropping over 2%. If we take the EuroStoxx50 as a benchmark, it’s the 3rd consecutive time that the early April recovery high serves as a trigger for a downward correction, each one being larger than the previous one. The increased volatility and failure to resume the buy-on-dips pattern since the early November vaccination breakthrough is a clear warning shot. US stock markets have been trading rocky in the run-up to and after last week’s 4%+ US CPI reading as well. European bond markets underperformed US Treasuries. Higher inflation expectations have been accompanied by lower real rates across the Atlantic whereas they stabilized in Europe. The difference lays within the next step of the central bank with balanced eco risks probably prompting a slowdown of ECB PEPP-purchases from June onwards, whereas the US Federal Reserve continues to preach maximum employment over price stability. The latter implies extremely accommodative conditions to stay in check for longer. Tonight’s FOMC Minutes could give us more insight on deliberation concerning inflation risks and the necessity to react to them (in first instance by tapering). The German yield curve bull flattens at the time of writing with yields losing 0.9 bps (2-yr) to 2.6 bps (30-yr). The initial jump higher ran into resistance, mainly in EU swap rates. The EU 10y swap rate lagged Bund yields of late (Bund/swap spread < 30 bps), but today went for a test of 0.21% resistance. That’s simultaneously the 2016 bottom, the 2020 top and 38% retracement of the 2018/2020 decline. A break on first attempt didn’t succeed. 10-yr yield spreads vs Germany continue their gradual widening trend, adding up to 3 bps for Greece and Italy. Changes on the US yield curve are less outspoken, falling 0.5 bps to 1 bp across the curve. The US dollar strengthened its back, but the move lacked real momentum. The trade weighted greenback couldn’t regain the 90 handle while EUR/USD remains just north of 1.22 (intraday high at 1.2245). USD/JPY 109 support (incoming uptrend line since start of the year) is under heavy test with JPY for obvious reasons (risk off) trying to take the upper hand. EUR/GBP extends its slow rebound away from the 0.86 big figure.
News Headlines
Reported by Spanish media on Monday and confirmed today, Catalonia’s two main separatist parties have struck a powersharing agreement to govern the Spanish province. The breakthrough unlocks a three-month stalemate in the wake of the elections on February 14. The pro-independence government consists of the left-wing ERC and Together for Catalonia (JuntsxCat). The CUP expressed support for the regional government’s leader Aragones (ERC) but isn’t part of the coalition. The three parties together won 74 of the 135 seats. The region’s Socialists won the popular vote during the elections. However, lacking a majority and being isolated by all pro-independence parties, their chances of a seat in the government were close to non-existent.
The 27 EU ambassadors have agreed to allow vaccinated travelers into the bloc without having them spend days in quarantine first, according to rumours. The same applies for people coming from countries that have the pandemic under control (ie. a 14-day case rate of less than 75 per 100 000). While already agreed in principle earlier this year, there were still some hurdles on the way to a full agreement to tackle. The new rules could be formally approved later this week and are expected to be implemented soon thereafter as to save the upcoming tourist season.
