With US markets closed in observance of the Martin Luther King Jr Holiday, trading took a slow start of the week. Asian equity indices finished mixed with China outperforming in the wake of better-than-expected Q4 GDP data. After opening in the red, a protracted and gradual bottoming out process brought minor gains for Europe eventually. The fairly guarded trading session did not hurt core (German) bond yields, on the contrary. The German yield curve bear steepened with yields up 1.6 bps (10-yr) to 1.8 bps (30-yr). Peripheral spreads didn’t budge whatsoever. In Italy, premier Conte won a first crucial vote of confidence in the lower House (see headline below). Dollar FX markets were an ocean of calm in which the greenback more or less retained the benefit of the doubt, holding on to Friday’s gains. EUR/USD finished the session slightly lower near 1.208. The trade-weighted DXY was headed towards 91 but closed stable at 90.77 in the end. EUR/GPB took out 0.89 intraday amid a cautious risk setting but also failed to hold on to it as the tone gradually improved. The pair closed the session just south of 0.89.
A broad-based rally is lifting Asia-Pacific stocks this morning. Hong Kong (+2.15%) is one of the outperformers even as the region decided to extend social distancing measures. China lags. The PBOC injected the most short-term cash since the end of 2020 amid concerns over tighter liquidity after using the tool to drain cash for six days straight. Nevertheless, short term Chinese yields continue to rise following yesterday’s surge in the wake of the GDP release. USD/CNY trades slightly weaker, below 6.49. Core bonds trade slightly weaker, USTs underperforming in a catch-up move. The dollar is facing selling pressures amid risk-on. The Australian and New Zealand dollar lead G10 peers along with the Norwegian krone. EUR/USD has the eyes set on 1.21. USD/JPY is the exception to this morning’s dollar weakness, tentatively capturing 104.
Today’s economic calendar only contains Germany’s ZEW investor sentiment index which is expected to show a growing divergence between the current assessment and the expectations component. However, its market moving potential usually is very limited. We keep a close eye at new Treasury Secretary Yellen’s confirmation hearing (cf. infra). The Wall Street Journal earlier this week reported Yellen is expected to affirm the US’ commitment to a market-determined dollar. She reportedly doesn’t actively seek to comment its level nor to deliberately weaken it. It’s doubtful whether this will halt the (long-term) decline in the USD, especially when Yellen at the same time will be promoting the massive Biden stimulus proposal against a (currently) constructive risk sentiment. EUR/USD bounced of support near 1.206 yesterday and could extend gains today. Core bonds are likely to stay under selling pressure. EUR/GBP struggles for a relaunch after hitting support near 0.886, weighed down by the current risk environment. That said, there is no need for a break lower either given the (economic) challenges sterling faces.
Italian PM Giuseppe Conte yesterday evening won a vote of confidence in the lower House of Parliament as he gained support of 321 member out of 629. The Italian PM now faces a key vote in the Senate were a majority will be much harder to get. Conte might get a simple majority if members of his previous coalition partner, ‘Italy Alive’, would abstain in today’s vote. Still, that would leave Italian PM in a uncomfortable situation as the government needs an absolute majority to pass certain (budgetary) measures.
At a her confirmation hearing before the Senate finance committee as New Treasury Secretary, Janet Yellen is expected to advocate further stimulus measures to support the restart of the economy. Yellen and the Biden administration are taking into account the high and rising debt pile of the US economy, “but right now, with interest rates at historic lows, the smartest thing we can do is act big”, Yellen is expected to say according to prepared remarks for the hearing as obtained by the press.