Will The Asian Bull Flattening Roll Over Into European And US Dealings?

Markets

Core bonds got hammered yesterday. USTs significantly underperformed the German Bund, reversing much of (short-term yields) or more than (medium- to long-term) the losses in the wake of the Fed policy meeting Wednesday. The yield surge happened even as oil prices tanked more than $4/b to $63.28 in what is mostly a technically driven move. Regarding US data, the Philly Fed Business Outlook grabbed most attention, soaring to levels (51.8) not seen since the seventies. The US yield curve bear steepened with the belly underperforming the wings. Yields jumped 2.2 bps (2yr) over 6.5-6.7 bps (5yr-7yr-10yr) to >3 bps at the very long end (30-yr tested 2.5%). The strong moves on US bonds weighed heavily on US stocks, tech in particular (Nasdaq -3%). European equities performed better. The EuroStoxx50 closed beyond its early 2020 peak at levels last seen in 2008. German Bunds declined in sympathy with USTs. Lagarde’s speech before parliament saying the ECB will prevent yields from going ahead of the economic recovery provided some counterweight though. German yields rose 2.7 bps (10-yr) to 4.6 bps (30-yr). It’s back to square one for EUR/USD on FX markets. The Fed-driven spike evaporated on strong USD yield support. The couple finished at 1.1915, down from 1.1979. The trade-weighted DXY rose from 91.4 to 91.8. The Bank of England kept its policy unchanged yesterday and stuck to its overall cautiously optimistic view and sees no real threat in rising UK yields for now. Sterling held strong and continues to test support at 0.855.

Asian-Pacific equities mostly trade in the red. China underperforms after the first high-level talks with the US quickly turned sour despite the new US administration. Losses mount to 3%. An interesting divide unfolds in Japan. The Bank of Japan in its altered policy framework will now only buy ETFs linked to the Topix (+0.2%) instead of the Nikkei 225 (-1.4%). It ditched the 6tn yen annual buying target but kept the 12tn yen ceiling to allow for more flexibility in times of market turmoil. Other changes include a widening of the band to 25 bps around the 0% 10yr yield target. The BoJ also announced and adjustment to its 3-tier reserve system to mitigate the negative side-effects if it lowers policy rates further. The yen slightly strengthens to below USD/JPY 109. The USD in general trades a tad weaker. Core bonds unconvincingly recoup part of yesterday’s losses.

The empty economic calendar paves the way for more of the same market moves today. The trend is your friend. We’re not fully convinced the Asian bull flattening will roll over into European and US dealings. The US10y yield in any case should soon find support at around 1.68%. Support for the 30y yield lies at 2.41%. In this context we remain cautious on EUR/USD, also eying this morning’s performance despite US yields declining. The pair isn’t leaving the sideways 1.16/1.20 trading range to the upside today. Sterling probably hold an advantage over the euro after the optimistic view by the Bank of England. The downward EUR/GBP trend channel remains firmly in place.

News headlines

French PM Castex acted to curb an accelerating pandemic by announcing fresh lockdown measures for Paris and several other regions, affecting around 20m citizens. The rules will take affect tonight and last for at least four weeks. Castex did promise small concessions to allow some freedom in contrast with previous French lockdowns. Meanwhile, most EU governments, including France, are again embracing the AstraZeneca vaccine following an all-clear by EU regulators. At 381 people per 100 000, Europe significantly lags US and UK infection rates.

Australian retail sales declines by 1.1% M/M in February while consensus expected a 0.6% M/M increase. Five-day lockdowns in several parts of the country weighed on activity. A robust labour market suggests the setback might only be temporary. Labour market data yesterday showed an 88.7k increase in employment, with the lion share going to full time jobs (+59k). The unemployment rate unexpectedly fell from 6.3% to 5.8%, the lowest level since April last year.