Asian investors were still unsettled by the unravelling of the reflation narrative last week in the US. Markets clearly were wrongfooted by the frontloading of interest rate hikes as signaled in Wednesday’s Fed dots. Friday’s comments from Fed’s Bullard airing his preference for a 2022 rate hike only created further doubts on the Fed’s commitment of prolonged policy support in the post-pandemic era. Risky assets sold off with the Nikkei hit hard (-3.29%). The US two year yield in Asia opened north of 0.25%. The 10-y and 30-y yield initially stayed in freefall (temporarily) dropping below 1.40 % and 2.0 % respectively. The flatter US yield curve and risk-off helped the dollar to preserve last week’s gains. However, contrary to what is often the case, European markets this time were a source of relative calm. Spill-over effects from Friday’s US moves (both in bonds and equities) were modest. European long term yields to a large extent decoupling from the US suggests that technical factors/liquidity issues maybe also played a role in the wild US interest rate swings. European investors evidently also don’t have to make up their mind on potential consequences of an early ECB interest rate hike. Whatever the driver, German/EMU started a ‘welcome’ re-steepening with yields now rising between 1.5bp (2-y) and 5 bp (30-y). The guarded reaction in Europe is also visible in intra-EMU bond markets, with 10-y spreads narrowing 1-2 bp. US investors also don’t push further on last week’s repositioning. The US yield curve also re-steepens with yields gaining between 2 bp (2-y) and 7.5 bp (30-y). The jury is still out, but a modest steepening is more in line with the Fed first embarking on tapering asset purchases before starting interest rate hikes. At the same time, the further rise in the 2-y yield illustrates that the debate on the timing of the first rate hike(s) is here to stay. European equities reverted an initial dip and currently trade with gains of about 0.50% . US indices also returned to the ‘old scheme’ with the Dow and the S&P in green (0.75%), but the Nasdaq lagging (0.25%) on higher LT yields. We keep a close eye on comments from New York Fed governor Williams later this evening. He usually is considered to keep a middle position within the FOMC.
Ongoing market stress early in Asia initially supported the dollar. EUR/USD touched the 1.1850 area, but rebounded as trading in Europe proceeded, currently trading near 1.19. DXY is easing toward to low 92 area. After recent sharp rise, a better equity sentiment and a bottoming in (US) inflation expectations, in theory suggest a slowdown in the USD rally. At the same time, higher ST US yields remain USD supportive. 1.1850 is developing as an intermediate EUR/USD support ahead of the 1.1704 end March correction low. Last week’s USD-rally/spike in global volatility put pressure on most smaller currencies ranging from the NOK, SEK and sterling, the CE currencies; the CAD, AUD and NZD to even the Swiss franc. Except for the Swiss franc, those currencies today try a tentative rebound. Safe haven demand for the yen dried up with USD/JPY holding stable in the 110.25 area. EUR/JPY tries to regain the 131 handle.
Swedish PM Lofven lost a confidence vote in parliament today. The vote was called by the Left Party, frustrated by Lofven’s deregulation plan aimed at the rental housing market. Together with a group of conservative and nationalist parties, they ousted the PM with 181 of the 349 lawmakers in favour. Lofven’s job now is to figure out a new viable coalition, calling a snap election if he fails to do so or resign, in which case the biggest parties in parliament will try to form a new government. The Swedish kroon is little changed at 10.22 EUR/SEK today but it is obvious that political uncertainty on top of a still-precarious economic recovery is not desirable for any currency.
German Finance Minister Scholz aims to borrow an additional €100bn next year to support the country’s revival from the pandemic. That’s a more than 20% increase compared to a previous budget plan (€81.5bn), two senior officials said. After 2022, the projected amount of new federal debt greatly decreases to 5.4bn in 2023 before stabilizing around 12bn in the two years thereafter. Scholz will present the budget to the cabinet on Wednesday, along with a proposal to suspend the constitutional borrowing limit for a third but final year in 2022.