Markets pondering the consequences for growth and monetary policy from the spike in corona infections in Europe still dominated market headlines at the start of the new week. European equities mostly incurred modest losses and EUR/USD drifted further south. However, in US dealings, the debate on faster Fed tightening gradually returned to the forefront. US President Biden reappointing Fed Chair Powell for a second term even triggered an outright sell-off on US bond markets. Dove Powell, this time was perceived as a hawk compared to Lael Brainard. The US yields rose up to 9.5 bps (5-y) with the belly of the curve again underperforming the wings (2-y +7.7 bps; 30-y +5.1 bps). The move was solely driven by a rise in real yields. The rise in yields didn’t revive investor interest for the auctions of 2- and 5-y year Treasuries. Yields trended further north after the sale. After the close of the market, Fed Bostic joined the chorus for speeding up tapering. Markets currently discount 3 Fed rate hikes by the end of next year. Despite uncertainty on the new covid wave, European yields, at a distance, joined the rebound in US yields. German yields rebound about 4 bps across the curve. The German 10-y closed near the previous support of -0.30%. Interestingly, ECB’s Villeroy repeated that the ECB is serious about ending PEPP in March as each wave of the pandemic is causing less economic damage compared to the previous one. He also indicated the need to step APP purchases might be limited, if any. US equities suffered from the sharp rise in yields with the Nasdaq underperforming (-1.26%). European equites ended mixed. Anticipation of faster Fed tightening further propelled the dollar. DXY closed near 96.5. USD/JPY finished within reach of the 115 mark (114.88). EUR/USD closed at 1.1237; the lowest level since July last year. The rise of the dollar and higher core yields also pressured the likes of the forint and zloty which set all-time/multi-year lows. The ascent of the Swiss franc slowed (close EUR/CHF 1.0483).
This morning Asian equities are trading mixed (Japan is closed). The yuan stays very resilient (USD/CNY 6.38) despite broad USD strength. USD/JPY (115.05) touched the strongest level since March 2017. Today, the preliminary Markit PMI’s will be published. US measures are expected to hold at lofty levels or even improve slightly further (59 area). European PMI’s are expected to ease, both for manufacturing (57.4) and services (53.0). We don’t expect a big market reaction. Given recent ‘dovish positioning’ especially in EMU interest rate markets on the rise in Covid infections, a positive surprise and/or persistent high inflation readings might have a bigger impact compared to a soft report. For the 10-y EMU swap yield, 0.10% is a key/strong support. For the US yield curve, the focus remains on the short end with the 2-y yield setting a new post-corona top north of the 0.56% resistance. The technical picture for most major USD cross rates improved further. A bottoming in European yields might slow the decline in EUR/USD. Even so, for now there is no sign of a U-turn in the broad USD ascent. EUR/USD 1.1168 (June 2020 low) marks intermediate support ahead of 1.1040.
The IMF approved a $700m disbursement to Ukraine yesterday. The funds are the second tranche from a $5bn programme agreed in the spring of last year to help the country handle the pandemic. While intended to battle Covid-19, the aid also provides a critical and timely financial cushion amid the build-up of 90 000 -” 114 000 Russian troops near Ukraine’s borders, raising red flags in the US and Europe about a potential deeper invasion after Russia annexed the Crimean peninsula in 2014.
Romania’s two largest parties have agreed to form a broad coalition government with the ethnic Hungarian party UMDR. Together they have a two-thirds majority in parliament. The deal ends weeks of political paralysis after previous government imploded in October. In the meantime, the country saw an upsurge of coronavirus cases and inflation that prompted the central bank to tighten policy twice as of yet. Ciuca from the National Liberal Party will hold the premier’s job for the first 18 months before handing over the title to one of his coalition partners from the Social Democrats. The Romanian leu held steady at a record low of EUR/RON 4.95.