Markets
Looming key events (European PMIs and the Fed) left trading in Europe and the US technical in nature. US data was a mixed bag with a disappointing Empire Manufacturing index but better-then-expected industrial production and capacity utilization. European equities gained 0.5-1%. WS eked out gains of >1%, banking on hoped-for progress in stimulus talks based on a $748bn proposal stripped of two contentious elements and the approval of the Moderna vaccine by US regulators. Core bonds lost some ground, USTs underperformed. The US yield curve bear steepened with changes more than 2bps at the long end. German yields rose 1-1.5bps across the curve. The dollar was pressured. DXY finished at 90.47 (down from 90.71), near the 2020 low. USD/JPY (103.67) forfeited support at 104 even as sentiment was constructive. EUR/USD closed a choppy session slightly higher at 1.215. Sterling was well bid, strengthening from north of 0.91 to 0.903 as markets hope continued Brexit talks will result in a deal eventually.
Wall Street’s green closing spilled over into Asian dealings this morning. Gains vary more or less between 0.5-1%. Japanese December PMIs remained in contraction territory as the country grapples to contain a third corona wave. USD/JPY extends losses nevertheless. The kiwi dollar tops the G10 scoreboard after an upbeat economic assessment by the NZ government (cf. infra). DXY and EUR/USD hover near yesterday’s close. Core bonds trade muted.
All eyes are on the Fed tonight. The central bank is expected to keep policy steady, both in terms of the Fed Funds rate as its bond buying programmes. It will offer qualitative guidance to the latter however, by tying asset purchases to the process of reaching the Fed’s inflation and employment goals. This rephrasing of the “coming months” currently used in the statement, will signal a much longer period of active bond buying. But will this dovish and meanwhile discounted twist suffice to keep a lid on long term rates, especially since US fiscal stimulus negotiations now seem to be in the final inning? As was the case for the ECB last week, this meeting could well be a last opportunity for the Fed to ease, risking to disappoint some part of the market if it doesn’t. A not-dovish-enough Fed or Powell could send Treasury yields higher by rising inflation expectations, hurting the dollar. Even if the Fed does ease (unexpectedly), we assume dollar weakness to hold via lower real yields (10y real yield slipped back below -1%). DXY is currently heavily testing the 2020 low. A break lower is a real possibility. Similarly, we watch for EUR/USD to set new 2020 highs in that case, even if risks for the European PMIs are tilted to the downside with most of the restrictive measures still in place or even extended. Negotiations on Brexit continue today. Markets perceive the lack of news as a good sign, sending sterling higher and pound volatility lower. One pessimistic quote can change all, but as long as the currently positive market attitude towards an agreement holds, there’s some more room for short term gains in the pound. UK data (CPI and PMIs) are of second tier importance.
News Headlines
The ECB eased its recommendation on dividend payout of European banks. The ECB still asks banks limit dividend payouts till September 2021 when the ECB will review its dividend rule again. For now, the ECB expects banks’ dividends and share buybacks to remain below 15% of the cumulated profit for 2019-20 and not to be higher than 20 basis points of the Common Equity Tier 1 ratio. ECB Supervisory Board Chairman Enria indicated that prudence remains necessary as there isn’t a lot of visibility on the asset quality trajectory yet.
The New Zealand government expects the economy to recover sooner than expected from the Covid-19 setback than previously thought. This will cause budget deficits and debt be substantially lower than expected too. The government now expects average growth in the year through June 2021 to be positive at 1.5% compared to -0.5% expected previously. The country’s net debt is forecast to peak at 52.6% of GDP in 2023compared to a peak of 55.4% in 2024 at the previous forecast. NZD/USD (0.71 area) is holding near the strongest level since April 2018.
