European stock markets closed 2%-2.5% lower, but off worst intraday levels following headlines that Russian President Putin gave his Foreign Minister Lavrov the go ahead to continue talks aiming to reach a ‘diplomatic solution’ in the Ukrainian conflict. US stock markets hesitated after Friday’s beating with main indices closing between flat (Nasdaq) and -0.5% (Dow). Technical pictures of key European and US equity gauges are still extremely fragile and at risk of deteriorating further.
US Treasuries fell prey to short covering ahead of the weekend, but that move didn’t persist yesterday. It is telling for the strength of the underlying bear flattening trend. US yield added 7.3 bps (2-yr) to 4.7 bps (30-yr). The US 7-yr yield even closed marginally above the US 10-yr yield.
The German yield curve bull steepened with daily yield changes falling up to 3.9 bps for the 5-yr. This is mainly a catch-up effect from Friday’s moves after European close. Intraday dynamics also showed that any rebound in German Bunds didn’t went that far, again telling something about the ongoing core bond sell-off as global central banks are behind the curve in tackling the inflation problem. 10-yr yield spread changes vs Germany widened by up to 3 bps.
The Japanese yen and the US dollar kept each other in balance yesterday with a close around 115.50 though the balance is again tipping in favour of JPY this morning. EUR/USD closed at 1.1307 and sits perfectly in the middle of the broad 1.1121-1.1483 trading band. EUR/GBP followed the move south in EUR/USD to close at 0.8357.
UK labour market data this morning printed too close to consensus to influence trading. The unemployment rate stabilized at 4.1% in the Oct-Dec period compared to Sep-Nov. Employment over that period declined by 38k vs the consensus estimate of -58k. January data nevertheless indicated a 31.9k decline in jobless claims with payrolls rising by 108k. Labour market data don’t alter the BoE’s normalization plans.
Today’s eco calendar contains German ZEW investor sentiment and the US February Empire Manufacturing Survey. We think they’ll play second fiddle and keep our focus on general risk sentiment. The Kingdom of Belgium will issue a new long 30y benchmark via syndication (OLO 95 June2053). It’s the second syndicated deal following a €5bn 10-yr benchmark mid-January (OLO 94 0.35% June2032). This year’s funding plan consists of raising €41.2bn in OLO funding to cover the lion share of the €48.28bn gross borrowing requirement. A New Green OLO remains in the pipeline for later this year.
The Japanese economy rebounded in Q4 at an 5.4% Q/Q annualized pace (1.3.% Q/Q) from an upwardly revised 2.7% Q/Qa contraction in the previous quarter. The outcome was slightly below expectations but the details were fairly constructive. Private consumption (+2.7% Q/Q) was the main driver as spending rebounded. However, the Omicron variant is again negatively affecting activity in the current quarter. Capital spending rose 0.4% Q/Q. Net exports made a positive contribution to growth of 0.2 ppt indicating a solid export performance. Inventory adjustment subtracted 0.1 ppt. Even after the Q4 rebound, Japanese activity is still slightly below its pre-pandemic level. The resurgence of the Omicron, higher prices and uncertainty on the impact of the Ukraine crisis might slow activity this quarter even as public spending will be a supportive. The 10-yr government bond yield (0.215%) remains well below the 0.25% level that the BoJ indicated it wants to defend last week. The yen strengthens slightly this morning with USD/JPY trading at 115.35.
Iron future contracts in Asia declined about 10% this morning, the second consecutive day of substantial losses. The decline comes as Chinese authorities indicated that they want to take action to address a spread of misinformation on prices. They warn iron are trading companies not to speculate, hoard or hike prices. Chinese authorities (state planner) are also reported to plan meetings with trading companies to ensure a smooth operation of trading in the commodity. The reference contract end last week touched the highest level since early August last year.