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Could US Treasuries Draw Some Support From A More Fragile Risk Environment?

Markets

Markets were still looking for a post-Fed equilibrium last Friday. US yields stayed near recent peak levels, but changes were limited (5& 10y + 1.5 bps, 30y -0.5bps). German Bunds outperformed with yields easing up to 2.7 bps/3 bps as ECB members repeated their commitment to keep financial conditions accommodative. European equities lost between 0.75% and 1%. US equities showed a mixed picture as the pause in the yield rally supported the Nasdaq (0.76%).. The dollar succeeded a modest gain, but EUR/USD still closed near 1.19. A new attempt of EUR/GBP to break 0.8540/50 support failed.

Turkish president Erdogan removing central bank head Recep Agbal is the eye-catchers this morning (Cf headline infra). The lira tumbled from USD/TRY 7.22 on Friday, to the 8.05 area. Lira volatility maybe has some minor impact on the decline in Treasury yields (up to 5.5 bps lower), but we assume the impact on global markets to remain modest. Asian equities show a mixed picture with Japan underperforming (-2%) and China outperforming (+1%). The Chinese 1-yr (3.85%) and 5-yr (4.65%) prime loan rates were left unchanged. China appointed two new members for the PBOC MPC. Their competence suggests more focus on the labour market and households’ (domestic) income. The yuan is little changed at USD/CNY 5.7075. The dollar is trading marginally stronger (DXY 92.04; EUR/USD 1.1891) as US equity futures show an indecisive picture (Nasdaq green, Dow red).

Several Fed and ECB members (including Fed Powell) speak today. Fed governors might provide insight in internal Fed thinking given last week’s (albeit limited) change in the dots. Fed’s Powell and Treasury Secretary Yellen appear before a House Panel tomorrow. Eco data include EMU preliminary Markit PMi’s (Wednesday), German Ifo confidence (Friday), US durable orders (Wednesday) and PCE inflation (Friday). Markets will also keep a close at the US auctions. Especially, 5 & 7y sales are interesting as the rise in US yields recently affected shorter maturities. We don’t take this morning’s moves for granted. A pause in the US steepening trend might be in the cards, but we don’t expect a sustained turn. Of late, higher yields were a driver for equity volatility. Short-term, maybe US Treasuries might temporary draw some support from a more fragile risk environment. The dollar recently retained the benefit of the doubt, but didn’t conquer any important technical level. A mild risk-off combined with a correction lower in US yields might confirm this pattern. EUR/USD 1.1836/1.1990 remains first references for EUR/USD trading. EUR/GBP last week extensively tested the 0.8540 area, but a real break failed. The euro picture remains fragile, but a more high profile trigger is needed for a sustained break. This week, we will receive an in extenso UK data update.

News Headlines

EUR/TRY spiked north of 9.50 in Asian trading this morning following an 8.60 close on Friday. Turkish President Erdogan triggered the sudden lira weakness by unexpectedly removing Turkish central bank governor Agbal. The CRBT chief only arrived in November after an equally surprising shock move. Agbal managed to restore some of the CRBT’s credibility by significantly hiking policy rates (10.25% to 19%) and vowing to stick to an hawkish policy for the next years in order to battle runaway inflation. Such policy is much against the will of President Erdogan who believes that high rates cause high inflation instead of keeping it in check and who vows low policy rates to support the economy. Agbal will be replaced by Sahap Kavicioglu, the 4th CRBT governor in less than 2 years.

Slovakia’s decision earlier this month to buy 2m doses of Russia’s Sputnik vaccine triggered a government crisis which already cost health minister Krajci his job. Members of the four-party coalition said they were left in the dark by PM Matovic’ move while opposition parties now call for his resignation as well. Matovic yesterday showed readiness to do so in order to defuse the political crisis, but he wants coalition partners to make sacrifices as well. The Russian Sputnik vaccine hasn’t been approved by the European Medicines Agency yet with Hungary being the only other European buyer.

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