Debt Markets Calm

Overview: A calmer European debt market and the second consecutive decline in the German two-year yield has weighed on the euro. It briefly dipped below $1.14 in the European morning. European bond benchmark yields are softer and most peripheral premiums over Germany have narrowed. Bonds in the Asia-Pacific area rose sharply after the sell-off seen in Europe and the US yesterday. Australian and New Zealand 10-year yields jumped 12 and 10 bp, respectively. The JGB benchmark poked above 0.20% and the BOJ has not shown its hand. The US 10-year is around 1.93% as the 2% psychological level draws near. Equity markets are mostly higher. In the East, China, Hong Kong, and India were the exceptions. Europe's Stoxx 600 is extending yesterday's gains but has yet to take out the pre-weekend high. US futures are firmer. The dollar has edged higher, though sterling, where Gilts are under pressure, and the Swiss franc are the most resilient. The Norwegian krone, Canadian dollar, and Japanese yen are the heaviest. Emerging market currencies are mostly lower. There the euro's weakness seems to be a drag on most eastern European currencies, including the Polish zloty, where the central bank is expected to deliver a 50 bp hike (to 2.75%). The rouble and South African rand are up about 0.4%, helping to lift the JP Morgan Emerging Market Currency Index. Turning to commodities, the rally in gold appears to be stalling after a two-day, $15 advance. Oil is pulling back with the March WTI contract slipping below $90. US natural gas prices have steadied after falling by around 25% over the past three sessions. Europe's benchmark has recouped most of the 5% lost yesterday. Iron ore prices are extending their rally that began in mid-December. Today is the sixth consecutive gain. Copper is moving in the opposite direction to probe the 200-day moving average near $439.

Asia Pacific

There are three developments in Japan to note. First, the US and Japan struck a deal to lift the 2018 steel tariffs (25%) starting April 1. It will allow 1.25 mln tons of steel a year to be shipped to the US without the levy. Second, household spending rose by 0.1% in December, helping the year-over-year rate improve to -0.2% from -1.3%. Yet it remains weaker than expected, and part of the reason why may be the unexpected weakness in income as winter bonuses were cut. Third, seasonal patterns held, and Japan's current account balance deteriorated in December from November. The trade deficit was smaller but still larger than expected. The key driver of the deterioration was the decline in primary income. The report also showed that Japanese investors were net sellers of US and European bonds. China was a net buyer of JPY1.04 trillion of Japanese debt, the most since August 2016.

Taiwan lifted its ban on most food imports from Japan's Fukushima regions. The ban will be lifted toward the end of next week. Only a few countries have maintained the ban since the 2011 meltdown (China, South Korea, and Taiwan). This could be a risky move politically. A 2018 referendum found most Taiwanese were in favor of keeping the ban. When the Taiwanese government lifted its ban on US pork with traces of ractopamine, consumers boycotted, and US pork sales slumped. Local elections will be held in November. Taiwan is trying to enhance its candidacy for the Comprehensive and Progressive TransPacific Partnership (CPTPP). While some members welcome Taiwan, many are reluctant to antagonize Beijing.

The US dollar is at a six-day high against the Japanese yen, probing the JPY115.50 area. The high from late January is nearer JPY115.70. There is an expiring option for $350 mln at JPY115.65 today and another for $610 at JPY115.80 that expires tomorrow. The market remains wary of unscheduled BOJ action to defend the 0.25% yield-curve control cap on the 10-year JGB. The Australian dollar is trading a little firmer. It extended yesterday's gains to almost $0.7140. It rose in the first four days last week before shedding almost 1% before the weekend. Last week's high was near $0.7170. A gain above the $0.7180 would lift the technical tone. The greenback has edged higher against the Chinese yuan for the second consecutive session for the first time this year. The gain is modest, but it did manage to close the gap from January 12 that extended to a little above CNY6.37. The PBOC set the dollar's reference rate at CNY6.3569, slightly lower than yesterday, but the market expectations rose from CNY6.3328 to CNY6.3555. Note that Beijing eased property loan curbs for public rentals.


ECB President Lagarde seemed to move into damage control mode yesterday after her hawkish comments at last week's central bank meeting spurred the jump in European rates. Like the Federal Reserve, which did not provide much forward guidance last month outside of signaling a March hike, Lagarde sought to secure the maximum "flexibility and optionality" given the high degree of uncertainty. She pushed back against a claim that it could raise rates before the bond buying was complete. Recall that the BOE made similar claims, but ultimately did not carry them out. Lagarde defended the sequence, which is to conclude the Asset Purchase Program buying shortly before the first hike.

blue and yellow star flag

Photo by Christian Lue on Unsplash

France reported a record trade deficit in December of 11.3 bln euros. Exports fell by 0.4% while imports rose 2.5%. Its bilateral trade balance with the US swung into deficit and its shortfall with China swelled by 900 mln euros. France's trade deficit with Germany widened by almost 500 mln euros. France's current account deficit also widened on the back of stepped-up foreign travel. Spain had disappointing news too. Industrial output plummeted 2.6% in December. The median forecast in Bloomberg's survey called for a 0.5% decline. November's 4.5% increase was revised to 3.9%. Italy was the bright spot. Retail sales were expected to have fallen by 0.3% in December. Instead, they rose by 0.9%, the biggest rise since June.

The euro found a bid after briefly dipping below $1.1400 in the European morning. There are options struck there for 1.24 bln euros that expire today. Look for the $1.1430-$1.1440 area to offer resistance now, and if that area holds, the euro could work its way toward $1.1350 over the next day or two. Sterling has edged a little higher, but it is running in resistance in the $1.3555-$1.3560 area. It holds the 20-day moving average and options for GBP1.1 bln that expire today. Buying emerged yesterday slightly below $1.35, where options for about GBP435 mln also expire today.


With no Fed speakers planned today, the US economic diary features the December trade balance. The advance goods balance already showed a record shortfall and this was incorporated into the Q4 GDP estimate. The US external deficit has not become a key focus for the markets, with the Federal Reserve set to stop buying Treasuries next month, the US funding needs would seem to be increasing. We suspect the "twin deficits" return to the fore in in the second half of the year.

A bipartisan group of 41 Senators is seeking more exemptions from the punitive tariffs on goods from China. Following the tightening of the rules last October, of the 2200 goods that were initially exempt only 549 were extended. While the administration continues to work on its response to China's failure to meet its commitment under the "Phase 1" trade agreement struck in 2018, there is a pushback.

Canada reports its December merchandise trade figures today, as well. Canada is enjoying a favorable terms of trade shock. Through November last year, the average monthly trade balance was in surplus of CAD771 mln. In the same period in 2020, the average was a C$3.25 bln shortfall, which was about twice the average in the first 11 months of 2019. The domestic protests against the vaccine mandate have reportedly closed the Ambassador Bridge on Sunday, a key connection between the US and Canada. The protests have shutdown Ottawa, and a state of emergency was declared. The direct market impact appears minor so far. The economic calendars for Mexico and Brazil are light but pick up starting tomorrow.

The US dollar has forged a shelf in the CAD1.2650-CAD1.2660 area here in February. Provided this area holds, the greenback can move to the top of its recent range seen near CAD1.2800. For today, look for resistance in the CAD1.2720-CAD1.2740 area. The greenback's pre-weekend range against the Mexican peso remains operative: ~MXN20.54-MXN20.79. The central bank meeting on Thursday, where most expect a 50 bp hike, may deflect speculative attention away from the peso. The US dollar fell 1.3% against the Brazilian real yesterday, giving back the gains from the previous two sessions. Real money seems attracted to Brazil, which is perceived to be near a peak in rate, and its equity market is weighted toward commodities.


Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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