Markets
Global core bonds are gaining ground today in a high-volume and choppy trading day. Risks sentiment was mixed overnight and continued to be fragile across Europe. Core bonds opened with an upward bias. Draghi said that an accommodative policy stance is still necessary but added that the ECB is ready to soften the impact of negative interest rates if eroding bank profitability would prevent stimulus reaching the economy. This might mean introducing a tiered deposit rate system which could all else equal also increase the bar for an eventual rate hike. The German Treasury sold a well-bid 10-yr bond against -0.05% (vs 0.12% at the prior auction), a negative rate yield for the first time since 2016, giving Bunds some extra tailwind. Core bonds lost some steam afterwards but spurred higher again ahead of the WS opening. The German yield curve is edging lower with changes up to -7 bps (5-yr). US Treasuries behaved similar to German Bunds and set a first peak before noon before temporarily paring gains after Dallas Fed chief Kaplan said it is too early for the Fed to consider possible rate cuts. The move didn’t persist as US Treasuries edged higher again. The US yield curve bull flattens with changes varying between -4.2 bps (30-yr) and   -7.2 bps (2-yr). Peripheral credit spreads are widening with Italy (+7 bps) and Greece (+4 bps) underperforming.
Trading on global markets was some kind of erratic today. Interest rates initially jumped up and down as investors tried to cope with comments of several ECB policy makers, including president Draghi. He confirmed the ECB’s soft U-turn at the March meeting as risks to growth have clearly tilted to the downside. At the same time, he indicated the ECB might consider measures to mitigate the side-effects of negative interest rates, if necessary. The euro temporary gained some ground, but the rebound soon ran into resistance. USD strength prevailed as US traders joined the action. Maybe markets interpreted the ECB considering measures to reduce the side-effects of negative interest rates as an indication that (EU) rates might stay low for longer. Whatever, the euro at least didn’t profit from the ECB comments. EUR/USD is changing hands in the 1.1260 area. USD/JPY initially declined as core yields declined further, but reversed the losses later (currently 110.50 area).
Sterling traders again kept a close eye at the developing Brexit story. The sequence and the outcome of all kinds of potential Brexit events is still highly unlikely. However, at least for now there is no (additional) negative impact on sterling. EUR/GBP declined to the low 0.85 area. Cable is trading north of 1.32. The UK Parliament will vote on several indicative amendments this evening on how to proceed with Brexit. At the same time, PM May is said to still consider a third vote on her deal later this week as some Brexiteers recently indicated they might favour the May proposal rather than face the risk of a soft Brexit or no Brexit at all. In any case visibility for GBP-traders remains close to non-existent.
News Headlines
The ECB is ready to mitigate the side effects of negative rates if they start harming the transmission of monetary policy, ECB president Draghi said. He didn’t elaborate on details but the ECB could be inspired by the BoJ’s or SnB’s tiered system where only deposits surpassing a certain threshold are charged with a negative rate.
The US trade deficit shrank from -$59.9b to -$51.1b (vs. -$57.0b expected) in January. That’s the most in 10 months and likely the result of China’s promise to buy more US soybeans put into practice. Lower oil prices and increased domestic production lowered the import bill in January in another boost to January’s surprising deficit narrowing.
Greece submitted a revised home foreclosure protection bill under which the state would pay monthly installments of the eligible households who are unable to do so. The idea is to expedite the clean-up of bank balance sheet who are grappling with $90bn euros of bad loans but it has yet to receive green lights from Greece’s official lenders.
