Calm in debt markets | Looking for Alpha

Overview: The calming of the European debt market and the second consecutive drop in the German two-year yield weighed on the euro. It briefly fell below $1.14 in the European morning. Benchmark European bond yields are lower and most peripherals’ premiums over Germany have narrowed. Asia-Pacific bonds rose sharply after yesterday’s sell-off in Europe and the US. Australian and New Zealand 10-year yields jumped 12 and 10 bp respectively. The benchmark JGB pushed above 0.20% and the BOJ failed to show its game. The US 10yr is trading around 1.93% as the psychological 2% level nears. Stock markets are generally higher. In the East, China, Hong Kong and India are exceptions. The European Stoxx 600 extends yesterday’s gains but is yet to hit the pre-weekend high. US futures contracts are firmer. The dollar rose slightly, through the British pound, where gilts are under pressure, and the Swiss franc is the most resistant. The Norwegian krone, Canadian dollar and Japanese yen are the heaviest. Emerging market currencies are generally weaker. There, the weak euro appears to be holding back most Eastern European currencies, including the Polish zloty, where the central bank is expected to hike 50 basis points (to 2.75%). The ruble and the South African rand are up around 0.4%, helping to lift the JP Morgan Emerging Market Currency Index. As for commodities, gold’s rally appears to be running out of steam after a two-day $15 advance. Oil retreats with the March WTI contract slipping below $90. US natural gas prices stabilized after falling about 25% in the past three sessions. The European benchmark has recovered most of the 5% lost yesterday. Iron ore prices continue their recovery that began in mid-December. Today is the sixth consecutive win. Copper is moving in the opposite direction to probe the 200-day moving average near $439.

Asia Pacific

There are three developments in Japan worth noting. First, the United States and Japan reached an agreement to lift the 2018 steel tariffs (25%) effective April 1. This will allow 1.25 million tons of steel to be shipped annually to the United States without levy. Second, household spending rose 0.1% in December, which helped the year-over-year rate improve from -1.3% to -0.2%. Yet it remains weaker than expected, and this may be partly explained by the unexpected weakness in revenues following the reduction in winter premiums. Third, seasonal trends continued and Japan’s current account balance deteriorated in December compared to November. The trade deficit was smaller but still larger than expected. The main driver of the deterioration was the drop in primary incomes. The report also showed that Japanese investors were net sellers of US and European bonds. China was a net buyer of 1.04 trillion yen of Japanese debt, the most since August 2016.

Taiwan has lifted its ban on most food imports from Japan’s Fukushima regions. The ban will be lifted towards the end of next week. Only a few countries have maintained the ban since the 2011 collapse (China, South Korea and Taiwan). This could be a politically risky move. A 2018 referendum found most Taiwanese in favor of keeping the ban. When the Taiwanese government lifted its ban on American pork containing traces of ractopamine, consumers boycotted and sales of American pork plummeted. Municipal elections will be held in November. Taiwan is trying to bolster its candidacy for the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). While some members welcome Taiwan, many are reluctant to upset Beijing.

The US Dollar is at a six-day high against the Japanese Yen, probing the 115.50 JPY area. The late January high is closer to 115.70 JPY. There is an option expiring for $350 million at 115.65 JPY today and another for $610 at 115.80 JPY that expires tomorrow. The market remains wary of unexpected action by the BOJ to defend the 0.25% yield curve control ceiling on the 10-year JGB. the The Australian dollar is trading a little firmer. It extended yesterday’s gains to near $0.7140. It rose in the first four days last week before losing nearly 1% heading into the weekend. Last week’s high was near $0.7170. A gain above $0.7180 would lift the technical tone. The greenback edged higher against the Chinese yuan for the second consecutive session for the first time this year. The gain is modest, but it managed to close the gap from January 12 that stretched a little above CNY 6.37. The PBOC set the dollar benchmark rate at CNY 6.3569, slightly lower than yesterday, but market expectations fell from CNY 6.3328 to CNY 6.3555. Note that Beijing has eased restrictions on home loans for public rentals.

Europe

ECB President Lagarde appeared to go into damage control mode yesterday after her hawkish comments at last week’s central bank meeting boosted European rates higher. Like the Federal Reserve, which didn’t provide much forward guidance last month outside of signaling a hike in March, Lagarde sought to ensure maximum “flexibility and optionality” given the degree high uncertainty. She pushed back on a claim that it could raise rates before bond buying ends. Recall that the BOE made similar statements, but ultimately did not implement them. Lagarde defended the streak, which involves wrapping up the asset purchase program shortly before the first hike.

France recorded a record trade deficit in December of 11.3 billion euros. Exports decreased by 0.4% while imports increased by 2.5%. Its bilateral trade balance with the United States has gone into deficit and its deficit with China has ballooned by 900 million euros. France’s trade deficit with Germany widened by nearly 500 million euros. France’s current account deficit also widened due to increased travel abroad. Spain also received disappointing news. Industrial production fell 2.6% in December. Bloomberg’s median survey forecast was for a decline of 0.5%. November’s 4.5% increase has been revised to 3.9%. Italy was the bright spot. Retail sales reportedly fell 0.3% in December. Instead, they rose 0.9%, the biggest rise since June.

The euro found a bid after briefly dipping below $1.1400 in the European morning. Options are concluded there for 1.24 billion euros which expire today. Look for the $1.1430-$1.1440 zone to offer resistance now, and if this zone holds, the Euro could move higher towards $1.1350 over the next couple of days. The British pound rose slightly but is holding resistance in the $1.3555-$1.3560 area. He holds the 20-day moving average and options for 1.1 billion GBP which expire today. The buy appeared yesterday slightly below $1.35, where options for around GBP 435 million also expire today.

America

With no Fed speakers scheduled today, the US Economic Journal presents the December trade balance. The anticipated goods balance was already showing a record deficit, which was factored into the fourth quarter GDP estimate. As the US external deficit has not become a major concern for the markets, with the Federal Reserve expected to stop buying Treasuries next month, US financing needs appear to be increasing. We suspect that the “twin deficits” will return to center stage in the second half.

A bipartisan group of 41 senators is calling for more exemptions from punitive tariffs on goods from China. Following the tightening of the rules last October, of the 2,200 properties initially exempt, only 549 have been extended. As the administration continues to work on its response to China’s failure to meet its commitment under the “Phase 1” trade deal struck in 2018, there is a pushback.

Canada is also releasing its December merchandise trade figures today. Canada benefits from a favorable terms-of-trade shock. Until November of last year, the average monthly trade balance was in surplus by C$771 million. Over the same period in 2020, the average deficit was C$3.25 billion, about double the average for the first 11 months of 2019. Nationwide protests against the vaccine mandate reportedly closed the Ambassador Bridge on Sunday. , a key link between the United States and Canada. Protests paralyzed Ottawa and a state of emergency was declared. The direct impact on the market seems minor so far. Mexico and Brazil’s economic calendars are light but picking up from tomorrow.

The US Dollar forged a shelf in the CAD1.2650-CAD1.2660 zone here in February. Provided this zone holds, the greenback may move higher from its recent range seen near CAD 1.2800. For today, look for resistance in the CAD1.2720-CAD1.2740 area. The greenback’s pre-weekend range against the Mexican peso remains operational: ~20.54 MXN-20.79 MXN. Thursday’s central bank meeting, where most expect a 50 basis point hike, could divert speculative attention from the peso. The US dollar fell 1.3% against the Brazilian real yesterday, reversing gains from the previous two sessions. Real money appears to be drawn to Brazil, which is seen to be close to a rate peak, and its stock market is commodity driven.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.