EMU and US equities parted ways yesterday. A constructive Asian session and a better-than-expected German ZEW kept European indices in the green for most of the day but fell prey to gravity in the final trading hours. Wall Street finished with nice (tech) gains of more than 1.5% (Nasdaq). Yellen’s confirmation hearing yielded no big surprises. She reiterated support for a large stimulus package, saying the US should “act big” and take advantage of very low interest rates. Yellen also floated the idea of issuing very long-term debt, including 50-year Treasuries to lock in the low rate environment. She also made clear the US approach to China won’t be radically overhauled, committing to address China’s “abusive practices”. On the dollar, the next Treasury Secretary said the US isn’t seeking a weaker currency and opposes any country that does but did not repeat the long-standing “strong USD policy” either. US yields retreated in the wake of Yellen’s testimony after rising as much as 3 bps earlier on the day. The US yield curve eventually rose marginally at the long end of the curve. German yields pared earlier gains in lockstep to trade unchanged. Peripheral spreads tightened with Italy outperforming (-4 bps) in the run-up to a confidence vote in the Senate that ended up in taking out the sting of the political crisis for now (see below). The US dollar traded in the defensive. EUR/USD finished at 1.213 (up from 1.2077). USD/JPY eked out a marginal gain but forfeited the 104 handle. EUR/GBP touched an intraday high near 0.892 but failed once again to retain the 0.89 at the closing bell.
Inspired by WS’s session yesterday, most Asian markets trade in the positive in an otherwise uneventful session. Japan underperforms. USD/JPY trades slightly lower amid general dollar weakness. The Chinese yuan strengths vs. the dollar to USD/CNY 6.468. EUR/USD ekes out a gain to 1.215. Core bonds trade close to but below yesterday’s close. The ECB said the central bank is actively looking to cap bond yield spreads and has specific ideas on what spreads are appropriate, Bloomberg reports overnight citing people familiar with the matter. The news helps explain the surprisingly numb reaction of Italian BTPs during the recent political rumble.
Today’s economic calendar eyes meagre. Joe Biden’s inauguration as 46th president of the US will be closely watched for any hints on future policy. However, many of the market-relevant themes probably have been touched upon by Yellen already yesterday. Nevertheless, his speech might cause some market volatility. Core bond investors might stay sidelined in the run-up to Biden’s message. The dollar’s corrective rebound is petering out. The EUR/USD bottoming out process is expected to continue after hitting support at 1.206 earlier this week and escaping the short-term downward trend channel thereafter. First intermediate resistance situates at 1.2173. UK inflation figures reported this morning were marginally higher than expected (0.6% Y/Y headline, 1.4% Y/Y core) but probably won’t inspire sterling trading. EUR/GBP cross rate is captured in technical trading with the 0.8865 support still being the key reference.
Australian Westpac Institute consumer confidence declined 4.5% in January after a rise of 4.1% in December. It was the first decline since August as new corona outbreaks in Sidney and Brisbane affected consumer mood. Current conditions, expectations, family finances, economy 1 & 5 years ahead and ‘buy major household items’ all declined on a monthly basis, but remained firmly above last year’s levels. The 107 level still indicates a broadly optimistic sentiment. The AUD/USD cross rate regained the 0.77 barrier. The recovery top at 0.7820 remains within reach.
At a confidence vote in the Italian Senate on Tuesday, PM Conte won a simple majority. Conte was supported by 156 votes in favour and 140 against and 16 abstentions. The vote allows Conte to continue as PM. However, as he needs a 161 absolute majority to pass some measures (including budget measures) in Parliament he will have to look for additional support. For now, the impact of the Italian political crisis had only a limited impact on European markets, including Italian credit spreads and/or the euro.