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Too Soon To Talk About Tapering

Market movers today

  • There are no market moving data releases scheduled for today, but ECB’s Lagarde and Villeroy, as well as Fed’s Kaplan, will be on the wires.
  • The German constitutional court (GCC) will meet today and give a final verdict on the legality of the ECB’s PSPP programme.

The 60 second overview

Fed: Investors will keep a close eye on the Fed minutes released tomorrow for any discussion about accelerating price pressures. Yesterday, Fed’s Clarida indicated that it is too soon to talk about tapering, citing the weaker-than-expected April labour market report. His colleague Kaplan – a known ‘hawk’ in the FOMC – reiterated that he would prefer discussions about tapering to start sooner rather than later, but also said he expected a moderation in price pressures in 2022.

Japan: Asian equity benchmarks advanced this morning despite data showing that Japan’s recovery came to an abrupt halt in Q1 21. GDP declined by -1.3% q/q (-5.1% annualized), as the government imposed new curbs to halt the pandemic’s spread. The dip was deeper than expected, also due to a surprise drop in private investment and an unexpectedly steep build-up of inventories.

EU-US relations: Yesterday the EU reached a truce with the US on metal tariffs. The dispute started in 2018 when former US President Trump imposed duties on steel and aluminium imports from Europe, citing national security risks, and the EU retaliated with tariffs on a range of American products. Under the agreement the EU will refrain from increasing tariffs to 50% (originally scheduled for 1 June) and both sides will engage in a dialogue about overcapacity in the steel industry. After the EU and US already earlier agreed to suspend tariffs on their Airbus-Boeing subsidy dispute, the deal points to a further rebuilding of trade ties under the new US administration – a topic that will likely also be on the agenda when President Biden participates in an EU-US summit in Brussels next month.

Equities: Global equities slightly lower yesterday, dragged down by growth and not least the heavyweight tech sector. Value cyclical outperforming with energy on top on the back of another oil price rise. Still elevated uncertainty with big intraday fluctuation despite only smaller news to trade. VIX finished just below 20 and investors still have more focus on downside protection than upside gaining. This morning Asian markets are mostly higher with strong performance in Japan and Taiwan. The strong rebound in Taiwan comes as the deputy finance minister said the national stabilization fund is still monitoring the market. European futures in solid green this morning while US ones are 0.2% higher.

FI: European yields continue to drift higher as various market-based measures of inflation expectations continue to rise, such as 5y5y forward inflation swaps. Spreads between Germany and the rest of European government bonds are also widening, where semi-core and the periphery continue to underperform Germany. Meanwhile, US Treasuries continue to remain range bound despite the solid US economic data and spread compression between US and Europe continues although at a slow pace.

FX: Yesterday proved short of any considerable FX moves in G10 space. NOK followed both NZD and AUD modestly lower while GBP and CAD were among the winners albeit gains were limited to less than +1 standard deviation.

Credit: Credit sold off slightly yesterday with iTraxx Xover widening 2bp (to 254bp) and Main ½bp (to 51bp). HY closed 1bp wider and IG ½bp.

Nordic macro and markets

The Riksbank buys munis (SEK 0.5bn KI2302 and SEK 0.75bn KI2602) and has a webinar about the labour market in the aftermath of the corona crisis (presented by Deputy Governor Henry Ohlsson).

 

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