Investors struggled a bit for direction today ahead of important data tomorrow (US services ISM and ADP employment) and Friday (official payrolls report) and a slew of events (Norges Bank, Czech National bank, Bank of England and Scottish parliamentary elections) in between. For today’s data, we retain yet another record US trade deficit (-$74.4bn) for the month March, shedding more light on the -0.87ppt contribution to the 6.4% q/q annualized US GDP growth published last week. European equities overcame an early yet minor morning dip to trade marginally in the green when a sudden risk-off repositioning sent a jolt through markets. Stocks trade about 1% in negative territory. US stocks open lower as well with tech (-1%) underperforming. The financial newswires saw military tensions between China and Taiwan, Singapore’s tougher lockdown and Ferrari postponing its financial targets as potential catalysts but none of those sound very convincing to us. Rates markets were not left untouched either with US yields retreating from intraday highs at the exact same time. The curve bull flattens a tad with yield changes varying from negligible (tenors up to 5y) to -2 bps (30-yr). Neckline support in the 10-yr yield (-1.6 bps) March-April head and shoulders formation (1.59%) is being tested extensively. German Bunds heavily outperform US Treasuries as yields swapped a 1 bp increase for losses ranging from 1.8 bps (5-yr) to 3.4 bps (30-yr). The 10-yr yield gives up support near the -0.20% area (previous recovery high from February). European peripheral spreads vs. Germany widen 1 bp (Spain, Portugal) to 4 bps (Greece).
The risk-off spike filtered through currency markets as well, especially in yen-combinations. EUR/JPY came already under pressure in early European dealings and dipped below intermediate ST support around 131.4 to change hands at 131.2 currently. USD/JPY reversed an initial rise towards 109.4 to trade back in the low 109 area. The dollar does hold the upper hand against other G10 peers though. EUR/USD even tested 1.20 support before bouncing to 1.202 at the time of writing. A break below the 1.20 would call off the negative dollar momentum. The trade-weighted USD erases yesterday’s losses to fill bids at 91.23 (up from 91). Sterling was headed for some nice gains against the euro, strengthening to the highest level in almost two weeks. The so-far inexplicable market ripples saved EUR/GBP (0.868 vs. 0.867 at open) however, thus keeping the narrow sideways trading range around the 0.87 pivot nicely intact. We’re putting our hopes for more active trading in the hands of the Bank of England and Scottish elections that could bring the Scottish independence theme back to the foreground.
The price for the reference European Union carbon permit (EU Allowances) today climbed above € 50 per ton for the first time since start of the carbon trading market in 2005. The contract only traded at € 32 per ton at the start of the year. Via the bloc’s Emission Trading System (ETS) some polluting industries are able to exchange excess or shortages of carbon allowances. The system is one of the EU’s main tools to reduce greenhouse gas emissions from power plants, industries or the airline sector. Aside from a growing industry demand in anticipation of stricter EU climate rules, increased demand from private investors is also cited as driver behind the rise in the carbon contract.
March factory gate prices in Brazil showed a further strong building of inflationary pressures. PPI prices rose 4.8% M/M and 33.5% Y/Y. Annual growth for manufacturing output rose 29.2%. Prices of mining products even printed 126% higher compared to the same month last year. Prices in March for the third consecutive month rose in 23 of the 24 activities inquired in the survey. The central bank of Brazil started a tightening cycle with a 75 bp rate hike in March and is expected to take a similar step to 3.5% at its upcoming meeting tomorrow as higher food and fuel prices stoke inflationary pressures.