Market movers today

Fed vice chair Clarida is speaking today, among others. Pressure is increasing on the Fed to act as markets are pricing in 2.5 cuts over the next year but we think it is likely to stay on hold for now and especially so if equities do not continue to decline.

Today, the EU is set to finally adapt the EU-UK trade negotiation objectives, which were finalised yesterday. The UK government is expected to finalise the UK’s objectives on Thursday. Recently, there have been increasing tensions between the two.

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In recent weeks, the central bank of Hungary has tightened excess liquidity and market expectations for several hikes have been building. We think the central bank will tone down its newfound hawkish tones in favour of a wait-and-see approach.

Per Jansson is holding a speech this morning (see FX section).

Selected market news

The selling of global equities, fading inflation risks and declining bond yields continued yesterday. Meanwhile, in FX, the dollar continued to gain.

The key difference of yesterday as compared to recent weeks was the scale of things. Germany’s DAX was down 4%, US’s S&P500 by over 3% and broadly EM saw selling in equal amounts. This also cascaded into the Asian session overnight. Cyclical sectors such as autos, technology and energy are leading the way down. US yields are now at their lowest since 2016 and inflation expectations are getting there. In Emerging Markets, sovereign credit spreads have also started to move higher, albeit still at very low levels. Broadly speaking, continued uncertainty is taking its toll and may very well continue to do so in the coming days. This is also putting upward pressure on EUR/DKK and in turn the Danish central bank for further FX intervention.

The rally in the global bond markets continues although it is looking more like the traditional ‘flight to quality’ than a ‘flight towards duration’. Yesterday, we saw a big widening in the spread between Italy and Germany as well as a modest widening of the Bund spread as core-EU markets outperformed the periphery. Italian government bonds were hit hard as the coronavirus hit the Italian equity market. Furthermore, US Treasuries continue to outperform German government bonds. Short term the rally is likely to continue especially in the US Treasury market, while we expect that the rally in Bunds will be more moderate as more rate cuts from the ECB seem unlikely.

Besides a tapering in the geographical spread of the coronavirus or unexpected improvements in key short-term macro indicators, the circuit breaker for these market moves is starting to move towards the US central bank. Quite often, verbal intervention may indeed be enough to calm the waters, at least for some time. During the week, several FOMC members are due to speak but we do not think they will change the current signal of being on hold. The Fed, however, is feeling increased pressure with investors pricing in nearly three cuts over the next 12 months. While we continue to see the global economy as likely to rebound over the summer and sharply so, markets have yet to start discounting this as of today.

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