Markets
(Equity) markets enjoyed an outright risk-on day yesterday after the market turbulence end of last week. However, the move was not equally visible in different parts of the market. European equities rebounded 1.0%-1.5%. US indices rose between 0.76% (Dow) and 2.55% (Nasdaq). Uncertainty on the rise in volatility due to the retail driven short squeeze eased. US stimulus again came in the picture as US president Biden met 10 Republicans to find common ground. The meeting was labelled constructive but for now there remains a big gap between the $1.9 trillion intended relief of the Biden administration and the $618 bln Republican offer. Even so, for markets, stimulus still being ‘work in progress’ for now is strong enough to revive reflationary bets. This was less visible in bonds and even largely ignored by the dollar. The US yield curve steepened with the 2-year yield declining 0.2bps but longer maturities rising up to 2.5bps (30-y). The rise again was mainly driven by a rise in US real yields. The US ISM manufacturing index eased slightly from 60.5 to 58.7, but remained at lofty levels. The direct impact of the report bond/other markets was modest. German Bunds slightly outperformed with yields rising less than one bp across the curve. The dollar didn’t join the US risk-off narrative and succeeded an atypical rise, probably inspired by higher real yields. EUR/USD drifted below 1.21 and closed at 1.206, within reach of the 1.2054 January correction low. USD/JPY also continued last week’s break out of the standing downtrend channel, testing the 105 big figure. The rise in the US currency also contrasted with a rise in the oil price. Brent crude returned close to the recovery top (high $56 area). Sterling extended its protracted rebound, especially against the euro. EUR/GBP closed at 0.8827, confirming last week’s break below the 0.8860 support.
Asian markets this morning are joining the risk rebound from WS yesterday with gains mostly ranging between 0.75% and 1.50%, Taiwan outperforming (2.0%+). Stress on the Chinese money markets eases further due to PBOC action. Still the yuan rises marginally this morning (USD/CNY 6.46 area). Oil (Brent $57 p/b) is testing the recovery top. The dollar is holding near yesterday’s intra-day peak levels (DXY currently 90,95).
Today’s eco calendar only contains the first estimate for Q4 EMU GDP growth. First estimates in several member countries already indicated that the setback in Q4 was probably less than feared. The impact on trading should be limited. We keep a close eye on the dollar. At least for now, the US currency maintains a good momentum despite a better risk sentiment. A break below 1.2054 opens the way to the key 1.2011 barrier. In Belgium, we look for the sale of a new 50-y OLO via syndication.
News Headlines
The Australian central bank wrongfooted markets this morning. The RBA kept its policy rate unchanged, but unexpectedly extended its bond buying programme by A$100bn (at the current pace of A$5bn/week). Governor Lowe also indicated that the cash rate won’t be increased until actual inflation is sustainably withing the 2%-3% range, something the board doesn’t expect the occur until 2024 at the earliest. Growth projections for this year and next are 3.5% with GDP expected to erase the Covid-hit by the middle of this year. One of the reasons of the RBA’s sudden easing is probably balancing the near term winding down of fiscal support. Losses for the Aussie dollar remained limited with AUD/USD declining intraday from 0.7660 to 0.7620. The Australian yield curve is barely made a kneejerk reaction lower which was rapidly reversed.
The US Congressional Budget Office upgraded its economic outlook from July last year. They now expect GDP to grow at an average annual rate of 1.7% between 2020 and 2024, compared to an average of 1% previously. The CBO now expects a return to end of 2019 GPD levels by mid-2021, even without additional fiscal stimulus. The nonpartisan government body upgraded its scenario as the downturn was not as severe as expected and with the December round of stimulus ($900bn) also playing a role. Inflation is forecast to rise above the 2% Fed target after 2023, but without really spiking (average 2.1% from 2024-2031).
