Markets

Traders sought for inspiration. There was little to no guidance from economic data. But with that to change later this week (a.o. PMI business confidence), investors chose to stay on the sidelines today. We see some underperformance by European (risky) assets after two days of the opposite. Stocks there swung between gains and losses while Wall Street opens with gains of about 1%, thereby erasing much of yesterday’s decline. Those moves come even as the new coronavirus outbreak in China shows signs that the virus could be mutating, making the development of a vaccine might get even trickier. The German Bund went nowhere but US Treasuries fell slightly ahead of the inaugural 20y bond auction. The US yield curve bear steepens with yields advancing 1 bp (2-yr) to 3 bps (30-yr). German yields change barely. Peripheral spreads vs. Germany’s 10y yield are mix. Italy and Spain widen 2 bps, Greece outperforms with -5 bps. On a related note, the UK sold its first ever bonds with a negative yield (£3.76bn 2023 bonds with a yield of -0.003%).

The dollar fell marginally while at the same time the euro continues to hold rather strong despite weaker appetite for other European assets. EUR/USD ekes out gains from the low 1.09 area towards 1.096 at the time of writing. The trade-weighted dollar extends its decline sub 100 (99.29 currently). USD/JPY went for another test of 108 this morning but that move lacked momentum. The couple retreated to 107.6. The weakest UK inflation figures since 2016, both headline and core (0.8% y/y, 1.4% y/y respectively), triggered some sterling losses during early trading hours. With both measures well below the Bank of England’s inflation target (2%), today’s readings added to the already very lively debate about negative policy rates in the UK. EUR/GBP went higher though the test of the upper 0.89/0.896 range bound failed soon enough. The currency pair showed no clear direction for the remainder of the day, hovering within this week’s established narrow trading range. EUR/GBP is currently filled bids around 0.893. Cable is going nowhere in the mid 1.22/23 area.

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News Headlines

At its first PELTRO liquidity providing operation the ECB allotted only 851 mln of funds to banks. The operation had a maturity of 497 days and an interest rate of 25 bps below the MRO rate. The program mainly intended to provide liquidity to smaller banks that don’t have access to the TLTRO operations. The low take-up suggest that the banks targeted by the program are currently in no high need for liquidity as they are able to attract funds via other channels.

At the tap of an existing government bond maturing in 2023, the UK Treasury sold 3.76 bln worth of bonds at a negative rate (-0.003%). It was the first time that a UK bonds was sold at negative yields. The sale occurs as a debate develops within the Bank of England whether the UK should follow the likes of the ECB and the SNB in applying a negative policy rate. Several BoE members, including governor Bailey, appear in a hearing before a Treasury Committee later this afternoon.

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