Markets
German Bunds extended their underperformance against US Treasuries as ECB protagonists keep hitting the same nail. 50 bps rate hikes seem granted at least in February and March with current consensus suggesting rate hikes in May and June as well. This hawkish path clinches with the drop in yields since the start of the year. It lasted until last Thursday before core bonds – and Bunds in particular – faced new selling pressure. German yields added 5.1 bps (2-yr) to 14.2 bps (30-yr) on a daily basis. A 10% rise in the reference European gas contract (TTF) played its role as well as colder/normal winter weather arrives. Daily changes on the US yield curve ranged between +4.5 bps (2-yr) and +9.3 bps (30-yr). The sell-off on bond markets unlike on Thursday didn’t spill into stock markets. Main European indices narrowly held on to small gains for most of the session while US benchmarks rallied into the weekend in a tech-driven move. Nasdaq rose by 2.6% with the S&P (1.9%) and Dow (1%) following. From a relative point of view, the US has been lagging Europe during the NY rally. The relative yield support in combination with positive risk vibes helped the euro to a weekly close above 1.08 (1.0856). The pair this morning in thin trading (lunar NY celebrations in China, Hong Kong, South-Korea,…) makes a first attempt at 1.09 with next resistance at 1.0942 (50% retracement on 2021-2022 decline). The trade-weighted dollar closed almost spot on the 102 big figure and is testing the sell-off low at 101.53 as well this morning. Sterling performed well last week with EUR/GBP failing to take out the resistance area roughly between 0.8850 and 0.89 as a batch of decent UK data (apart from Friday’s retail sales) suggested that the Bank of England won’t be able to drop its guard yet when comes to battling inflation. EUR/GBP this morning nevertheless joins the EUR/USD move higher with the pair changing hands around 0.8775.
Today’s eco calendar is thin with January EMU consumer confidence and some ECB speeches the sole events. We expect bonds to remain under (more modest) selling pressure while keeping a close eye on stock markets. Their strong start to they year is at odds with our market view (related to complacency around central banks’ reaction functions). On FX, a test of 1.0941 resistance is becoming unavoidable. Tomorrow will be more interesting with global PMI releases. Consensus expects a marginal improvement – though still sub 50 – from December levels which would reflect the less pessimistic vibe on growth since the start of the year. Other things to watch are the US Treasury’s end-of-month refinancing operation, the continuation of Q4 earnings season and the first estimate of US Q4 GDP on Thursday.
New Headlines
South America’s two biggest economies, Brazil and Argentina, will announce the start of preparatory works on a common currency. Dubbed the “sur” by Brazil, it would create the world’s second-largest currency bloc, after the euro, and reduce reliance on the USD. The plan is still at a very preliminary stage and will be discussed at a summit in Buenos Aires this week. Its initial focus is on Brazil and Argentina but both will invite other Latin American countries to join. A union that covers all of Latin America would represent about 5% of GDP compared to the euro area’s 14%. The idea is not new and there have been talks in the past but they often stranded on (usually rightwing) political opposition and persistent macroeconomic imbalances of both countries.
European Council President Charles Michel proposes several steps to strengthen European economies in a response to the US’s Inflation Reduction Act. In an interview with Handelsblatt published yesterday, he said a successor to the social bonds of the SURE program would allow governments short in cash to make more green investments. The SURE program was launched early in the pandemic to finance short-term employment schemes. Michel also said there was a need for a “sovereignty fund” with the participation of the European Investment Bank. As EU member states are shareholders in the EIB, they would have more say and benefit directly from the investments made. Michel considers this concept as a more realistic alternative than issuing bonds similar as those under the EU’s post-pandemic recovery fund.
