The reflationary spirits were already wide awake during this morning’s Asian session and spilled over into European dealings without much ado. Investors put comfort from mostly better-than-expected growth figures as revealed by Japan overnight, showing they have become more resilient to the coronavirus measures. Second, and more importantly, the ongoing vaccination campaign is boosting hopes for a perhaps quicker return to normal than previously assumed. Here, the UK has taken such a distinct (western) lead, it allowed prime minister Johnson over the weekend to lay out a timetable for finally lifting the measures. UK assets outperform today in anticipation. Sterling gains vs. every G10 major but one; being the Norwegian krone which is surging amid an umpteenth rise of oil prices (Brent crude oil surpasses $63/barrel). EUR/GBP retreated from 0.875 to 0.8726 currently after giving up support at 0.8747. The next high profile technical reference stands at 0.867. UK gilt yields surge about 8 bps at the very long end of the curve. UK equities (+2%) outperform despite the strong sterling rally today. European stocks print gains of 1%+. The German yield curve bear steepens with yields up 1 bp (2-yr) to 4.5 bps (10-yr and 30-yr). An ongoing rise in overall commodity prices (e.g. copper, platinum, cf. below) supports the move north. The German 10-yr yield tested the August 2020 high (-0.377%) while the 30-yr variant pushed through the similar reference. The European 10-yr swap yield (-0.055%) in one move halves the remaining gap for it to leave sub-zero territory. US cash markets are closed in observance of President’s Day but futures markets show US assets are playing the reflationary theme as well. US Treasuries receive a blow, suggesting Friday’s close above key technical levels (1.20% for the 10-yr yield and 2% for the 30-yr) are to be confirmed when cash markets open tomorrow. Currency markets are mostly trading according the classic risk-on script. The dollar trades heavy though it is currently well off intraday lows. EUR/USD tested last week’s highs at around 1.214 before retreating to 1.2126 currently. The trade-weighted DXY is just shy of 90.4. The Japanese yen is today’s main loser with USD/JPY jumping beyond 105(.4). EUR/JPY’s test of 128 failed but nevertheless changes hands at 127.8 (up from 127.16), the highest level since end 2018.
Copper today extended last week’s rally. The metal touched $8406 a ton at the London Metal Exchange, the highest level since 2012. The rise in the metal is driven by the global reflation trade that also affects other parts of the markets. Some specific topics are mentioned as well. Amongst others, a smaller than usual drop in China output during the Lunar New year holidays due to the travel restrictions is mentioned as a factor supporting the metal. The global reflation trade also caused platinum to reach a six-year top today. The metal jumped above $1300 an ounce.
In an interview, UK PM Johnson said that he wants to UK to follow a path out of the Covid-19 lockdown that is ‘cautious but irreversible’. The PM will set out a detailed ‘road map’ for ending the lockdown in a statement on February 22. The UK PM reiterated that his priority will be to try to reopen schools from March 8 but no decision has yet been taken. If possible, the UK PM might also indicate earliest potential dates for removing restrictions from other sectors.
As was the case in other economies in the region of late, Poland January inflation surprised on the upside of expectations. Inflation in January rose 1.2% M/M and 2.7% Y/Y. As such, inflation again returned north of the of the 2.5% (+/- 1.0%) NBP inflation target. The market expected a stabilization near 2.4%. Administered costs and food prices were an important driver behind the monthly rise in inflation. Ongoing above target inflation makes further NBP policy easing difficult. The NBP policy rate currently stands at 0.1%. The zloty today gained modest ground against the euro trading near EUR/PLN 4.485.