Markets
It was a rather dull European start to the trading week following an exciting end last week, but things turn more vibrant as US dealers enter. The eco calendar was empty bar outdated December German industrial production data, which didn’t impact markets. German production is losing momentum (0% M/M), failing to grow for the first time in eight months. Industrial output declined by 8.5% in 2020. US Treasury Secretary Yellen’s pledge to return to full employment by the end of 2022 did support a positive risk sentiment. Asian bourses gained around 1% with Japan outperforming (+2%). Main European indices add over 0.5% with Italy standing out as former ECB-president Draghi is on track to form a new government. The EuroStoxx 50 sets a recovery high (3680) above the early January top. US equity markets opened solidly as well, with S&P 500 and Nasdaq already conquering fresh all-time highs since last week. Reflationary spirits remained present on bond markets as well, with the German Bund opening weaker and US Treasuries extending last week’s slide. US Treasuries found an intraday bottom after the US 10-yr yield touched the 1.2% mark for the first time since March last year. The US 30-yr yield kissed the psychologic 2%-mark for the first time since February. Both the US 10y and 30y yields are also at the higher bounds of their respective upward trading channels since Summer. It’s going to be a big week for US bond markets with the US Treasury preparing its mid-month refinancing operation. Especially 10-yr and 30-yr auctions (Wednesday & Thursday) will be watched closely. Are (international) investors already prepared to take up additional US debt or do they fear a further increase in inflation expectations, keeping them side-lined a little longer. Daily changes on the US yield curve range between -0.4 bps and +1.3 bps today with the belly of the curve underperforming the wings. The German yield curve bear steepens with yields rising by 0.2 bps (2-yr) to 2.7 bps (30-yr). 10-yr yield spread changes vs Germany are close to unchanged with Italy (-4 bps) outperforming. The German/Italian 10-yr yield spread now trades around 94 bps, closing in on the multiyear low of 89 bps reached early 2015.
The US dollar tried to recover from Friday’s beating, but ended up in dire straits as the US session got going. The trade-weighted dollar is currently sliding sub 91 again. EUR/USD drifted to the 1.2020 mark before retaking Friday’s momentum and currently changing hands around 1.2060. If US reflation is the name of the game, then a weaker dollar (cf 2020) is obviously again part of it. Even USD/JPY is slightly succumbing to the pressure (105.35). EUR/GBP is very marginally higher around 0.8790 after last week’s BoE-induced setback. Recovery gains are technically irrelevant.
News Headlines
The IMF indicated that the Polish central bank should clear spell out the reason why it is trying to weaken the zloty by interventions. According to the IMF, ‘further support for monetary easing would best be achieved through expanded asset purchases’. ‘Intervention for monetary policy purposes could be justified if additional purchases failed to adequately pass through to prices, leaving the achievement of monetary policy accommodation in doubt.’ After the regular Article-IV Consultation the IMF also indicated that the zloty was undervalued on a real effective exchange rate basis. Even so, the zloty today extended its gradual rebound. EUR/PLN is trading in the 4.48 area.
South Africa halted the roll-out of the AstraZeneca’s Covid-19 vaccination that was planned for this week. Data showed that the vaccine gave only minimal protection against mild or moderate infection from the South African variant among young people. The developments in South Africa might have consequences for the roll-out of vaccinations in other regions. The South African rand declined modestly against the dollar and temporary revisited the USD/ZAR 15 barrier, even as global sentiment on risk remained constructive.
