Markets
The surprise hawkish turn by the Reserve Bank of New Zealand this morning showed markets what to expect when the economy is performing well: higher policy rates. The kiwi dollar and rates jumped and that might have supported US bond yields, which rose two to three bps at the time too. That, however, changed as soon as European markets joined. ECB member of the executive board Panetta held a dovish speech at the 8AM open. He said the economy is far from self-sustaining and still needs a lot of fiscal and monetary support. He thinks discussing the phasing out of PEPP is “clearly premature”. Only a sustained upward trend in underlying inflation and inflation expectations in line with the ECB’s aim “could justify a reduction in our purchases”, which has not been the case. He even labeled the recent yield increase (barring the last few days obviously) as undesired. His comments probably weren’t the only driver for the core bond yield reversal but they came as the inflation/reflation hype turned a bit to the background lately already. They also receive more than average market attention in an otherwise empty trading day as we’re nearing an important ECB policy meeting in June. The German Bunds outperform US Treasuries as yields decline 1.8 bps (5y) to 3.3 bps (30y). The 10y yield (-2.9 bps) fell out of the Q2 upward channel and is near support at -0.20% (February interim high). Peripheral yield changes are negligible. US yields lost all earlier Asian gains to trade flat across the curve. Yields at the very short end are being pressured this much by the Fed’s massive QE (injecting liquidity into markets), that they periodically turn negative. This caused the volume at the Fed’s overnight reverse repo facility – where banks loan the Fed money at 0% in return for collateral – to surge dramatically in just a few days. It’s markets simply returning the favour of ever more liquidity straight back to the Fed. Or how QE is reaching its utility inflection point.
The US dollar shook off a morning temper and even manages to eke out minor gains against most G10 peers, the kiwi dollar being the only exception. EUR/USD fainted from an intraday high of as much as 1.226 after Panetta started speaking. The pair is now changing hands in the 1.223 area. We warned in our morning report for the need of yesterday’s breach through 1.2243 to be confirmed or risk being classified as a false break. The latter seems to be correct for now. Similarly, the trade-weighted greenback (DXY) found support from 89,68 but remains below the 90 barrier. Sterling was on track for its first gain this week but comments from a UK government spokesman saying the country isn’t ruling out anything on local lockdowns spooked investors a bit. EUR/GBP pared losses to trade almost unchanged near 0.865.
News Headlines
After a steep rise till early this month, several agricultural commodities including corn, wheat and soy went in correction modus. Over the previous days, more favourable growing conditions in particular in some parts of the US were said to have caused selling from the cycle/multi-year peak levels reached early May. Aside from a better supply side narrative, measures taken by China to reign in commodity prices are also mentioned as a factor beyond the price correction.
Contrary to some other agricultural and cyclical commodities, gold extended its recent rise. Spot gold regained the $1900 p/ounce level, the highest level since early January. Gold was on a downward trajectory earlier this year as higher (real) yields supported by expectations of a recovery of the economy dampened demand for the non-interest rate bearing metal. However, the recent correction of the dollar, ongoing inflationary fears and recent stabilization/correction in core nominal yields add to a more favour context bullion.
