Equity markets were nothing but ecstatic yesterday. Lacking guidance from the economic calendar, investors simply held on to anecdotical evidence about omicron’s limited impact on public health and therefore on the economy. Both European and US shares swung 1.5-3%+ higher. Core bonds lost ground with US Treasuries hugely underperforming the German Bund. The yield curve in the US bear flattened with changes at the short end ranging from 4.9 bps (5y) to 5.9 bps (2y). A $54bn 3y auction yesterday showed mixed results with a higher bid-to-cover (benefiting from a recent sharp yield increase) but increased primary dealer award at the expense of indirect award. The 3y tenor closed 5.8 bps higher. The long end of the curve (10 to 30y) added 1.9 bps to 4bps. The German bear flattened too but changes were limited to 2.5 bps (2y) to 1.3 bps (10y). The resulting US/EMU yield differential kept EUR/USD under pressure. The pair slipped to an intraday low of 1.1228 but managed to finish at 1.1267 after all. It is striking to see the euro struggle this much in such an upbeat trading session. The common currency is not at all preparing for a major shift by the ECB next week. Sterling also remained in the defensive, which was unusual as well. Central bank uncertainty may be the common factor here. Unlike in the US where Fed chair Powell downplayed the impact of omicron, both the ECB and BoE expressed more caution. This may have implications for monetary policy. EUR/GBP briefly dipped below 0.85 but in the end closed unchanged at 0.8508. A surge in commodity prices lifted the likes of the NOK, CAD, AUD and NZD.
The optimistic mood in Europe and on WS again spills over into Asian-Pacific dealings this morning. Almost a vicious cycle developed in recent days. Stocks add about 1% in a slow news day. New Zealand (+2%) outperforms. Core bonds trade somewhat higher. US yields are down 1 bp across the curve. The US dollar goes south while the euro tries to build on yesterday’s intraday turnaround. EUR/USD trades around 1.129. China’s yuan hits the strongest level since 2018 (USD/CNY 6.35) as improved growth prospects trump easier PBOC monetary policy (in theory a CNY-negative).
It’s yet again vast emptiness on today’s economic calendar. Tonight’s $36bn 10y auction is worth mentioning though. Unlike the short-to-middle end of the curve, long bond yields have not rallied as much, on the contrary. We’re keen to see if and how it impacts demand. The Bank of Canada holds its final policy meeting of the year. It has a stellar payrolls report from last Friday to take into account while assessing the potential economic impact of the omicron strain. For European and US markets, sentiment remains key. We may see a slowdown from the equity and the core bond yield boost yesterday. Since the euro recently behaves more JPY-like, we expect the EUR/USD decline to ease as well. First resistance situates near 1.135 (downward trendline connecting June-Oct lows), followed by 1.1422 (Aug 2020 correction high).
The US House passed a bill (222-212) which sets up a procedure for raising the debt limit by a simple majority in the 50-50 split Senate instead of by the 60 votes needed now. A higher debt limit allows the government to issue new debt to pay for existing obligations. Under the deal reached by Senate majority leader Schumer and minority leader McConnell, Democrats will raise the debt limit by a dollar amount, instead of just suspending it for a certain amount of time. Democrats are still discussing the exact size with a vote scheduled in Senate on Thursday.
The Reserve Bank of India (RBI) kept its policy rate unchanged at 4% in a 5-1 vote. The monetary policy committee still prefers to err on the side of caution given the slack in the economy. Private consumption remains below its pre-pandemic level with the omicron variant threatening to delay a durable and broad-based recovery. The RBI expects the Indian economy to grow by 9.5% in the year ending in March with an inflation forecast of 5.3% for the full year. The RBI uses a 4% inflation target with a 2% tolerance band. USD/INR stands its ground near this year’s highs around 75.65.