Global Risk Positioning Probably Remains the Focal Point

Markets

Yesterday’s trading session was expected to be an interlude for global trading, with policy decisions of the likes of the ECB and the Bank of England to provide some welcome distraction. US labour market data (Claims, Challenger layoffs, Jolts) were interesting, but not supposed to have the same weight as drivers for (bond) markets as is the case for the ISM’s or the payrolls. However, this ‘preview’ didn’t take into account the ongoing AI-related repositioning, questioning valuations and business models in a wide range of affected sectors and triggering a broader risk-off.

The ECB policy meeting did develop according to script. The central bank left the policy rate at 2% and reconfirmed that it expects inflation to stabilize around target. It sounded optimistic on resilient growth. Risks both related to growth and inflation are seen as broadly balanced. On the euro, Chair Lagarde said that the ECB’s assessment already incorporates the weaking of the dollar since March and downplayed the impact of recent swings (on inflation). The ECB is in a good place to wait-and see. German yields finished the day between unchanged (2-y) and -2.3 bps (30-y).

Interesting intraday price action in the UK: the curve move evolved from a bear steepening to a bull steepening. During the morning session UK risk premia jumped as uncertainty on the political fate of UK PM Starmer rekindled the debate on fiscal sustainability. At some point the UK 30-y added 7 bps. Later, BoE policy took over as a driver for trading. The BoE as expected left its policy rate unchanged at 3.75%, but 4 out of the 9 MPC members already voted for a 25 bps rate cut. Inflation is seen returning to the 2% target around April and is expected to stay there. The central bank also remains highly sensitive to an easing of the labour market. UK yields nosedived during Governor Baileys press conference, but closed off the intraday lows. UK yields changed between -5.1 bps (2-y) and +4.2 bps (30-y). Markets now see a 60% chance for a 25 bps rate cut in March. None of both drivers (politics or BoE) was good news for sterling. EUR/GBP jumped from the 0.8650 are to close at 0.8705.

In the US, weak labour data (claims from 209k to 231K, higher Challenger layoffs, lower job openings) kickstarted quite an impressive rally in US Treasuries. It has been different of late, but as the session proceeded, US Treasuries for once fully played their safe haven role. Uncertainty on AI spending, on its impact on a broad range of other sectors and stretched market positioning in several corners of the market, triggered a broad-based risk-off move. US equity indices dropped between 1.2% (Dow) and 1.59% (Nasdaq). However, also (precious) metals (gold, silver, copper) this time didn’t provide any shelter. The run to Treasuries pushed US yields between 11.1 bps (5-y) and 7.6 bps (30-y) lower. The impact on FX was limited, with slightly US outperformance (DXY 97.82, EUR/USD 1.1777).

Asian equity markets (ex Japan) mostly trade in red this morning as investors assess yesterday’s AI driven risk-off. The global risk positioning probably remains the focal point for markets going into the weekend. We are keen to see whether the safe haven rally in (US) bonds can continue. The eco calendar contains ECB survey of professional forecasters and U. of Michigan consumer confidence (including inflation expectations). Markets also look forward to the outcome of the Japanese parliamentary elections and the reaction of Japanese bond markets and the yen.

News & Views

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