Markets
German Bunds opened in positive territory, but gradually returned the initial gains as global sentiment on risk improved. Investors were also looking forward to the ECB policy announcement. In the policy statement, the ECB omitted its easing bias as it didn’t repeat its intention to increase bond buying if necessary. European yields jumped up to 4 bp higher upon the publication of the statement. During the ECB press conference, the 2018 growth forecast was revised slightly higher but the bank decreased the inflation forecast for 2019. The ECB president admitted that the change in the language on QE was unanimous, but at the same time said that no victory can’t be declared on inflation yet. The initial rise in EMU interest rates was reversed during the press conference. At the time of writing, German yields are little changed across the curve. On the intra-EMU bond markets, yield spread chances versus Germany mostly narrowed further with Greece (-10bp), Spain and Portugal (-6/-5bp) outperforming and Italy (+4bp) underperforming. The changes in US Treasury yields are much more contained. Markets’ angst on an outright trade war eased, but the issue of the US putting import tariffs in place isn’t out of the way yet. US yields decline between 0.6 bp (2-y) and 3.0 bp (30-y) in rather volatile trading.
The dollar gained modest ground against the euro and yen as risk sentiment on improved. Investor fears on an outright trade war eased as the White House indicated that import tariffs could be applied in a selective way. The euro jumped temporary higher as the ECB dropped its indication that it could still raise the amount of asset purchases if needed. However, the euro strength was short-lived as other elements in the ECB assessment were little changed. Draghi indicated that the removal of this easing bias should be considered as mostly backward looking. The ECB president also said that the EBC is monitoring FX volatility as a factor in its policy assessment. In line with EMU yields, the euro reversed initial gains during the press conference. EUR/USD trades currently in the 1.2350 area, slightly lower on a daily basis. USD/JPY is little changed hovering near the 106 level.
Sterling trading was mostly driven by global factors today as there were no important UK eco data. EUR/GBP mostly followed the intraday swings of the single currency due the ECB policy statement and during the ECB press conference. The pair trades marginally lower on a daily basis. (currently 0.8915 area). The post-Drahgi reversal of EUR/USD is also slightly weighing on cable. The pair trades currently in the 1.3850 area.
News Headlines
German factory orders declined a bigger than expected 3.9% M/M in January. The consensus estimate only expected a decline of 1.8% M/M. Orders for German factories were still 8.2% higher compared to the same month last year. A sharp fall in orders from other EMU countries was the culprit behind the decline. Statistical issues with respect to year-end factory closures might have distorted the data.
Ratings agency Moody’s cut Turkey’s sovereign rating one notch further into junk territory. The rating was put at Ba2 with a stable outlook. Moody’s said the government appears to be focused on short-term measures. It also mentioned erosion of the strength of the country’s institutions and the increased risks from its current account deficit.
The Italian League Party is rumoured to hold informal talks with dissidents of the center-left Democratic Party to seek support for a governing alliance. Both parties didn’t answer questions on the issue.
