A bad day at the office for European stock markets. Main indices shed 1% to 1.7%, breaking momentum. The fragile balance between stimulus-driven recovery hope and a dire near term outlook tilted in favour of the dark side.Slower-than-expected vaccine roll-outs in a world of Covid-mutants can trigger bouts of risk aversion, but doesn’t alter the underlying medium term narrative of H2 economic recovery with an immune population. US President Biden promised jabs would be available to all US citizens by Spring. The risk off market sentiment in European dealings translated into stronger core bonds. The German yield curve bull flattened with yields losing 1.8 bps (2-yr) to 4 bps (30-yr). The US yield curve shifted in similar fashion with yields shedding 0.6 bps (2-yr) to 5.7 bps (20-yr). The US 10-yr yield as feared lost 1.07% intermediate support, paving the way for return action lower towards 0.98%.The dollar took the upper hand on the FX market, though gains were disproportional with moves on EU equity or bond markets. The trade-weighted greenback closed at 90.39 from a 90.24 open. EUR/USD dipped from 1.2170 to 1.2139. USD/JPY was unchanged at 103.75. US stock markets traded volatile, hitting an air pocket after a strong start, but still managing a positive close. Those curvets couldn’t really derail other markets. The US Treasury started its end-of -month refinancing operation with a strong 2-yr Note auction which stooped at a record low 0.125%.
Asian risk sentiment is weak this morning with main indices losing up to 2%. Core bonds and the dollar hold near yesterday’s best intraday levels suggesting more cautiousness at the European start. Italian PM Conte will hand his resignation to Italian President Mattarella this morning. Senators from Italy Viva bought the PM some time last week by abstaining in an Upper House confidence vote, but threatened defeat the ruling coalition in an upcoming vote later this week. Conte will probably be asked to find a new majority. Failure would probably mean the end of the non-elected PM and leave the initiative to Italian party leaders to sort things out. Another alternative would be a caretaker government to steer Italy out the current crisis. Early elections remain unlikely because of the difficulty of holding them as long as mass immunity remains absent. That should keep a lid on any potential Italian spread widening. Today’s eco calendar contains US consumer confidence and Richmond Fed Manufacturing Index. The IMF publishes its World Economic Outlook and Q4 earnings season accelerates. The US Treasury sells 5y Notes. Despite this abundance, risk sentiment will continue to set the tone for trading with most signs pointing in the direction of some additional risk-off. Stronger than expected UK labour market data can’t boost sterling this morning.
South Korean Q4 GDP grew 1.1% q/q after a 2.1% q/q jump in Q3. Growth is still a negative 1.4% on a yearly basis. Exports (5.2% q/q) were again the biggest driver of Q4 growth,followed by capital formation (1.8%). Imports grew 2.1%. Both private (-1.7%) and public (-0.4%) expenditures fell. On a sectoral level, agriculture (4.9% q/q), manufacturing (2.8%) and electricity (5.9%) were the biggest contributors to growth. The South Korean won loses against the dollar while SK stocks retreat from yesterday’s closing all-time high.
PBOC advisor Ma Jun sees bubbles arising in stock/property markets,caused by changes in liquidity and leverage ratios and proposes a gradual policy shift (toward job growth and controlling inflation) to prevent bigger economic and financial risks from rising in the medium term, 21st Century business Herald reported. The PBOC unexpectedly withdrew liquidity from markets this morning. The Chinese yuan strengthens marginally to USD/CNY 6.47.
Republican Senate leader McConnell said he’s dropping his demand that Democratic Majority Senate leader Schumer promises not to abandon the filibuster rule. Under the rule, most legislation would require 60 votes in a 50-50 split Senate to advance. McConnell conceded after two moderate Democrats assured that they would not support throwing the rule overboard. Both leaders can now work out a power sharing agreement for the Senate