Markets
In sentiment driven trading (no important eco data) a two-day correction on US/ European equities already attracted interest to buy the dips. US indices regained between 0.93% (Dow /S&P) and 1.19% Nasdaq. The link between equities and bond rates currently isn’t that obvious, but a benign bond sentiment (especially easing real rates), probably is a positive for equities. Anyway, changes in US and German yields yesterday were less than 1 bp across the curve. The dollar tried a cautious recovery early in the session, but the improved risk sentiment easily blocked any further gains. EUR/USD tested the 1.20 area, but closed unchanged at 1.2035. USD/JPY also close little changed at 108.08. Similar picture for EUR/GBP, finishing a technically inspired session at 0.8640.
This morning, Asian equities mostly join the WS rebound with Japan outperforming (2.0%). Still US Treasury yields continue their downward trajectory. The dollar (DXY 91.11, EUR/USD 1.2035; USD/JPY 108.00) shows no clear trend. The yuan extends its comeback trading at the strongest level against the dollar in over a month (USD/CNY 6.4850).
Today’s data calendar contains EC consumer confidence and the weekly US jobless claims. Claims are expected to rise modestly to 610k, after a unexpected sharp decline to 576k last week. The focus will be on the ECB policy meeting and Christine Lagarde’s press conference. Policy parameters will almost certainly be left unchanged, but markets will look for the bank’s assessment of recent developments on Covid (vaccinations versus ongoing high level of infections) and its impact on the economy going forward. In March meeting, the ECB stepped up the pace of Q2 PEPP bond purchases to prevent what it considered an unwarranted tightening of monetary conditions due to higher long-term interest rates. A first formal evaluation is only planned in June when new ECB growth and inflation projections are available. EMU interest rates are little changed compared to the March 11 levels. After an initial decline late March, EUR/USD also reversed that loss and is even marginally higher, potentially tightening monetary conditions if it were to continue. In this context, Lagarde will probably confirm the ECB’s commitment for ample support. The German 10-y yield neared the -0.20% resistance earlier this week but the test was rejected. ECB’s commitment on accommodative monetary conditions and a ‘soft guidance’ from US bond markets might extend consolidation below the key -0.20%/-0.14% are for the German 10-y. The 10-y US yield (1.53%) continues its correction south after the break below the 1.60/1.58% support. The correction in US (real) yields currently also remains negative for the dollar. The DXY-index struggles not to fall below the 91.00 handle. In EUR/USD, the USD currency needs a sustained break below the 1.1995/43 support area to call off the USD negative momentum. Yesterday’s price action suggests this won’t be that easy short-term.
News headlines
The Bank of Canada kept its policy rate unchanged at 0.25% yesterday but reduced the net weekly purchases under its QE programme to C$ 3bn. This action reflects the progress made in the economic recovery. It’s the first major central bank which starts slowing down net asset purchases. The BoC upgraded growth forecasts to 6.75% for this year, about 4% in 2022 and almost 3.5% in 2023. Over the next few months, inflation is expected to rise temporarily to around the top of the 1-3 percent inflation-control range before easing back toward 2% over the second half of the year. As slack is absorbed, inflation should return to 2 percent on a sustained basis sometime in the second half of 2022. That could be the cue to start hiking rates (end 2022) sooner than previously indicated (2023). The Canadian dollar received a boost from the hawkish message by the BoC with USD/CAD diving from 1.2625 to 1.25.
Italian PM Draghi will next week present a €221bn recovery package, consisting of €30bn national budgetary resources and €191.5bn of loans and grants from the Next Generation EU scheme. Some measures aim to tackle some of Italy’s structural weaknesses. They include the digitalization of public administration procedures and an overhaul of the Italian legal system. Other pillars are climate and environmental investment, infrastructure, and education. Details will be presented to the Italian parliament early next week.
