Fed Expires SLR Relief

Market movers today

  • We start the week in a quiet fashion today with few key data releases. Jerome Powell will give a speech on innovation at the BIS Innovation Summit, which is unlikely to contain market moving content.
  • In Germany, chancellor Merkel and state premiers will gather to discuss the possibility of stricter lockdown measures after rising Covid-19 cases and a sluggish vaccine roll-out.
  • Markets will also keep an eye on the ECB’s weekly data on bond holdings, after the Governing Council committed to scaling up its PEPP purchases to a “significantly higher pace” at the last meeting.
  • Later this week, the highlight will be the March flash PMIs on Wednesday from Europe and the US. Friday also brings the release of PCE inflation from the US, which is Fed’s favoured inflation measure as well as Michigan consumer sentiment.

The 60 second overview

Fed: On Friday the Federal Reserve announced it will not extend the relief on the supplementary leverage ratio (SLR) for banks. The relief was granted last year during the pandemic. We view the decision as USD positive and it could send Treasury yields even higher if banks have to offload large amounts of US Treasury bonds.

Turkey: Turkey is in focus this morning, with the lira plunging as much as 15% in early trading after president Erdogan sacked the central bank governor for the latest 200bp hike. Turkey is on its fourth central bank governor in less than two years. Volatility is set to remain high, but markets likely expect more rate cuts to come.

Equities: Equities ended the week very mixed after a volatile day where rates once again dominated the action in equity markets. US banks the biggest loser after Fed decided not to extend the SLR exception. Most defensive sectors in green and growth outperforming value with a small margin. The sector rotation was quite visible in the relative performance across US indices with Dow -0.7%, S&P 500 -0.1%, Nasdaq +0.8% and Russell 2000 +0.9%. Sentiment is mostly negative in Asia this morning. Japanese equites leading the declines as major autos taking a hit after Renesas warned of chip shortage following a factory fire. Futures in Europe and US are mixed with growth stocks higher as US are lower this morning.

FI: 10Y US Treasury yields rose a few bp on Friday as the Federal Reserve declined to extend the relief on the supplementary leverage ratio (SLR) for banks. The decision could send Treasury yields higher if banks have to offload large amounts of US Treasury bonds, but market participants differ on the magnitude of the impact on US Treasuries. The rise in US Treasury yields also sent the 10Y US-German yield spread back to pre-corona levels of 200bp. Given that ECB will scale up QE in the coming months then the US-German spread could continue to widen.

FX: We see a stronger dollar, Scandies lower, a stronger Sterling and we see many EM crosses as bottoming out versus USD, though RUB being an exception to this. A stronger and faster US recovery may bring more USD strength faster than we anticipate, while an EU growth surprise, a US recovery slowdown or a US-China trade deal removing tariffs are upside risks to EUR/USD.

Credit: HY bonds were under pressure on Friday and widened around 5bp while IG was marginally tighter. iTraxx Xover widened to 244bp (+1bp) and Main was more or less unchanged at 47bp.

 

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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