European equity markets held a cautious bias following a mixed Asian session. The recent surge in commodities (although less the case today) and yields continues to weigh on stocks that have already been frontrunning the post-pandemic recovery with great enthusiasm. Stocks quickly slipped in the red after opening flat (-1.5% for EuroStoxx50, sub 3700) but before paring about a third at the time of writing. Wall Street opens with losses as well with the Nasdaq again underperforming (-3%) and sentiment deteriorating. The reflationary narrative guided the bond markets during European dealings. US yields rose at some point up to 3 bps (30-yr) but forfeited those gains as the US joined. We look forward to Fed chair Powell’s testimony before the Senate later today and its impact on (bond) markets. He will probably try to nip the inflation “fear-mongering” in the bud. But Powell’s inflation denial might just as well trigger pressure on yields rather than ease it with markets testing the Fed’s tolerance level even further. The German Bund underperforms today, erasing all of ECB’s Lagarde induced (short covering) gains yesterday in a blow to the central bank’s credibility. Yields advance 3 bps (10-yr) to 3.3 bps (30-yr). The European 10y swap rate again rises north of 0%. Peripheral spreads to Germany’s 10y yield widen mostly with Italy (+3 bps) underperforming.
FX markets traded rather dull. The dollar stages a mini comeback with two out of three factors (stalling commodity prices and a vulnerable equity sentiment, but not interest rate differentials) playing in favour of the greenback. Although we should add that the relative importance of these elements in dollar trading changes daily. EUR/USD retreats slightly from 1.216 to 1.214 after having seen an intraday high at around 1.218. EUR/USD 1.219 remains the first resistance to be cleared. The trade-weighted greenback (unconvincingly) rebounded from the 90 big figure support level to 90.14. USD/JPY (105.38) found relief at the lower bound of the upward trend channel that coincides with the 105 handle. Sterling remains one of the better G10 performers. The UK December labour report fell short of expectations with a much bigger employment drop than expected. But as we’ve seen before, pound investors are quick to dismiss disappointing figures, eying a brighter economic future instead. Sterling tested support at EUR/GBP 0.862. A break didn’t follow but seems to be just a matter of time. Cable extends gains beyond 1.40(72).
In a webinar, Riksbank deputy governor Breman advocated that the Riksbank should be prepared to consider adding new tools the central bank’s toolkit. Short-term, a negative repo rate and increased quantitative easing are the most obvious tools to support the economy if needed. However, the bank must be prepared to act decisively and use new and untested tools if price stability is under threat. In a such a new framework, helicopter money, deeply negative interest rates, dual interest rates and Yield curve control shouldn’t be ruled out.
The central Bank of Hungary as expected left its policy rates unchanged. The base rates stands at 0.60%. The overnight deposit rate remains at -0.05%. Earlier this week, the MNB already kept the one week depo rate at 15 basis points above the base rate to put it at 0.75%. The bank today reiterated it will keep the gap between the base rate and the one week deposit rate as long as it is justified by the inflation risks. The MNB expects inflation to rise temporarily to around 4 % in the spring. MNB expects inflation to be 3.5-3.6% in 2021 before returning to around the 3% target in 2022. The MNB assessment was in line with previous meetings even as Q4 growth was stronger than expected and as MNB expects 2021 growth to be in the upper range of its December 3.5% 6.0% forecast range. The forint is trading marginally stronger near EUR/HUF 358.75.