The established uptrend in equities continued yesterday as investors anticipated a reopening of the economy in a context of persistent easy monetary and fiscal conditions. Good corporate results added to the move. European equities gain about 1%. Major US indices rose between 1.08% (Dow) and 1.23% (Nasdaq), with the Nasdaq and the S&P closing at a record. The rise in core yields slowed despite the outright risk-on and a stronger-than-expected improvement in US jobless claims. The US curve steepened marginally with the 2-y declining 0.6% but the 30-y still rising 1.3 bp. Fed Bostic downplaying tapering expectations maybe was a factor. German yields rose up to 1.3 bp (30 -y), with the 10-y yield nearing the -0.45% range top/resistance. The US holding the lead in the vaccination process continued supporting the dollar. EUR/USD dropped firmly below 1.20 (11) at 1.1964. USD/JPY confirmed its recent break higher (close 105.54). The sterling rally accelerated after the BoE policy statement. The BoE still wants to be prepared for negative rates if needed, but the new growth and inflation outlook indicated that this option isn’t in scope. EUR/GBP nosedived to close at 0.8750. Cable slightly outperformed a broadly stronger dollar (close 1.3672).
This morning, Asian equities mostly joined the WS rally with gains mostly between 0.5% and 1.5%. The USD maintains yesterday’s gains (DXY 91.53, USD/JPY 105.50 and EUR/USD 1.1965). The yuan is losing modest ground against a broadly strong dollar (USD/CNY 6.4740). However, recent indications that the PBOC might gradually move to somewhat tighter monetary conditions might help to put a floor for the yuan. Brent oil regained the $59 p/b mark.
Today’s US payrolls report is the eye-catcher for global trading. That said, recent trends on equities, interest rate markets and the dollar often developed rather autonomously/independent from the data releases. Markets mostly traded the hoped-for H2 recovery resulting from a growing number of people being vaccinated combined with a finalhuge fiscal injection, especially in the US. Still, the US payrolls remain an important input for trading. The US economy is expected to have added 105k jobs after a 140k decline in December. The jobless rate is expected unchanged at 6.7%. The market reaction to the report is not that straightforward. A strong report might question the need for at least part of the Biden stimulus package. However, with still quite a high degree of LT unemployed, Democrats probably will see enough reason to continue their fiscal injection. A strong report in theory should support the recent trend of higher US (LT) yields. That said, in a momentum perspective, the uptrend in the 10-y yield shows tentative signs of slowing with the 1.185% January top a first important resistance. On the FX market, EUR/USD cleared the 1.20 support area. We consider the move as both driven by a (technical) comeback of the dollar with at the same time a pinch of euro softness as Europe lags the likes of the US and the UK in the vaccination process/reopening. 1.1888 markets the 62% retracement from the November/January rally. Sterling yesterday also got a shot in the arm as the constructive BoE assessment on (H2) growth and relatively high inflation made the debate on negative interest rates rather academic. EUR/GBP 0.8672/21 is a next important support area.
The central bank of India (RBI) kept policy rates unchanged at 4% (repo rate). The RBI in its statement repeated its forward guidance it will keep an accommodative stance as long as necessary and at least until early 2022. The RBI said the economic outlook improved significantly with the rollout of the vaccine programme and the new Union Budget 2021-2022. Inflation corrected lower to the RBI’s 4% inflation target (with 2% tolerance margin) but warned core inflation remains elevated. The Indian rupee gains slightly to the dollar (USD/INR 72.91 from 73).
Voting Fed member Bostic said he’s not expecting the central bank to taper already in 2021. The Atlanta Fed governor kicked off the debate in early January, suggesting this could happen in the second half of this year if all goes well. Bostic said the Fed is “not locked into anything” and is explicitly willing to let the economy run hot, nuancing his previous hawkish comments.