• US equities close moderately higher, following a late session bounce that leaves the S&P at the technically important cycle highs (1150). Banking stocks led the increase on hopes on diluted reforms. Asian stocks trade mixed overnight, unable to follow Wall Street’s direction.

  • BOJ Shirakawa said the easy monetary policy was helping to curb yen strength, as markets speculate the BOJ would loosen policy next week.

  • Chinese Central Bank Su Ning said the US should not make a political issue out of the yuan, reacting on Obama who pressed China to move to a more market-oriented exchange rate

  • ECB Mersch, a hawk, sounded balanced in its comments yesterday. Recovery is uneven, inflation subdued and rates appropriate. ECB to keep progressively unwinding special measures. No discussions yet about European Monetary Fund.

  • France launches successfully a new 50-year OAT (€5B), showing investors’ appetite for long term debt is intact.

  • Obama may nominate Yanet Yellen, current president of the San Francisco Fed, to be the next Fed vice-chairman, replacing outgoing vice-chairman Kohn. Yellen is at the dovish ledger of the current FOMC.

  • Chances of a broad overhaul of US financial regulation dimmed after bipartisan Senate talks collapsed.

  • UK Gilts underperformed and Sterling appreciated against the euro after the BoE inflation attitudes survey showed that price expectations rose (slightly) to highest level since November 2008.

  • Swiss National Bank became more optimistic on growth, sees inflation moving higher in medium term, but sees still risks to the eco outlook. However, it kept saying that excessive CHF-appreciation would lead to an undesired tightening of policy. The Swiss franc was little changed versus the euro.

  • Today, the eco calendar contains the US retail sales, Michigan consumer confidence survey and EMU industrial production figures. Italy holds its BTP auction, while ECB Weber and BoE Dales speak.


Markets

Yesterday, global bonds closed the session with moderate losses. Technical factors and supply played a major role, as the US eco data, claims and trade figures, had little impact. In the US, the 30-year bond auction went extremely well with strong demand (including a record Direct Bid) and aggressive bidding (stop well below WI bid at stop). The market had still Wednesday eve’s strong 10-year Note auction in mind. So, curve play both ahead and after the 30-year bond auction was the main play in town, leaving the curve substantially flatter in the close. US 2-year yields went up 5 basis points, while 30-year yields dropped 2.5 basis points.

In EMU, German bond yields were up between 1.5 and 3.7 basis points, the shorter end underperforming the longer one. Looking at the Bund, following listless sideways trading in the morning session, the bond got hit around noon and rapidly fell toward the key 122.20 support level were the contract found its composure and later on gradually edged higher to limited daily losses of about 20 ticks. Also here the curve flattening may be attributed to the successful launch of the 50-year syndicated OAT. The ECB monthly bulletin contained no new info and remarks of ECB Mersch (see headlines) were uneventful too.

In the intra-EMU bond market, pressures reappeared on Portuguese and Greek bonds. The former were linked to a downward revision of Q4 GDP to -0.2% Q/Q (- 1% Y/Y) from flat, raising doubts about the ability of the austerity measures to trim the budget deficit enough to hit the objective. Indeed, the growth target of 0.7% for 2010 starts looking ambitious, but is still within reach. Greek bonds were hit by a general strike and violent street manifestations against the austerity measures decided recently. Besides these two countries that saw a spread widening of their bond yields versus Germany, other credits traded uneventful and narrowly mixed versus German bonds.

Rumours about the possible nomination of dovish Janet Yellen clearly had no impact, as one should expect the curve to steepen as a dove would get a more influential role inside the FOMC.

Regarding bond trading today, the US retail sales might be the defining factor, also via its impact on the equities. Indeed, the S&P closed at the technical key level of 1150 (the NASDAQ is already above the comparable level). A sustained break higher would be highly relevant, also for bonds. While the retail sales should be weak because of the weather, which is already the consensus, it is the reaction on the deviation of the consensus that may tell us more about the sentiment in the equity markets. We don’t have the feeling that a sustained break is likely and has much further to run, but we stay open-minded on the subject. We keep our modest negative outlook for bonds, but keep sidelined in attendance of an eventual break. A move (sustained) below 122.20 in the Bund would a first signal that a more pronounced correction might be in store, but one shouldn’t lose out of sight that the technical picture is still bullish and the highs at 123.05 (Bund) still within reach.

Today, the eco calendar is enticing with the US retail sales (February), Michigan consumer confidence (March) and euro zone industrial production (January). In February, US retail sales are expected to show a slight decline after rising by 0.5% M/M in January, as bad weather kept many households from visiting the malls. Weakness is forecasted to be based especially in autos, partially due to severe winter weather but also the massive Toyota recalls might have an impact. Core retail sales (ex gas and autos) are forecasted to have risen by 0.3% M/M, but we believe that the risks might be on the downside of expectations due to the bad weather. Michigan consumer confidence is expected to show a slight improvement in March (74.0 from 73.6) after declining in February. Concerns about the labour market and income prospects might keep consumer sentiment at relatively low levels. In the euro zone, industrial production is forecasted to have risen by 0.7% M/M in January, after falling by 1.4% M/M in December. Earlier released national data (from Germany, Italy and France) showed significant improvements in January and therefore the risks might be on the upside of expectations, but following the national releases this shouldn’t be a surprise for the markets. If industrial production would really improve significantly, this raises expectations that growth might pick up again in the first quarter of 2010.

On Thursday, trading in most currency cross rates was still tied to the existing trading ranges. This calendar of eco data was a bit heavier compared to the previous three days, but the US and jobless claims (in line with expectations) and the trade balance (better than expected but with a decline in both exports and imports) were not able to drive currency trading. So, currency traders had again no other option, but trying to capture global sentiment on risk. EUR/USD hovered around the mid 1.3600 area in Asia and during most of the European trading session. Stocks moving higher at the end of the US trading session also helped EUR/USD to close the day near the session highs in the 1.3680 area. The budgetary problems of the likes of Greece moving to the backstage might have been a slightly euro-supportive factor, too (even as the spreads of countries like Greece and Portugal remained under upward pressure).

The story for USD/JPY trading was not that much different from EUR/USD. Markets maintained a guarded constructive approach on risk, which kept the pair well bid. There was temporary some nervousness around the publication of the US data, but after all, the pair stayed decisively within the borders of the 90 big figure. Markets continue to speculate that the BOJ might be ‘forced’ to take additional measures to fend off the Fin Min complaints that it is not doing enough to fight deflation. This threat of additional measures of the BOJ is a (slightly) yen-negative factor, too. BOJ governor Shirakawa admitted that the Bank’s easy policy indeed helped to curb yen strength. However, we have the impression this BOJ talk is more for domestic purposes rather than really aiming to guide the currency market. Nevertheless, this kind of rhetoric is of course no support for the yen.

On the yuan, the bickering between the US and China on the valuation of the yuan continues as Chinese officials resisted calls from President Obama for a more market- oriented exchange rate. The scrimmages on the way to the semi-annual Treasury report in the US have obviously started. (Will China be labelled a currency manipulator or not mid April?)

In the UK BOE inflation report/survey showed a small rise in the inflation expectations of UK households and this sparked a brief rebound of sterling against the euro (and the dollar). However, with EUR/GBP still holding near the 0.9100 mark, the UK currency remains weak.

Today, the focus for markets will be on the US retail sales report (see higher). From a (currency) market point of view the question is whether this release will be able to sustain the constructive sentiment to risk and whether it will be able to push the S&P above the year highs in a sustainable way. If so, the risk trade might be extended. EUR/USD is testing a first important resistance area. A sustained break above the downtrend line since December (cf. graph) might be another indication that the downward pressure on the pair is easing and that the correction might go a bit further. Nevertheless, we for now we hold on to our longstanding EUR/USD negative bias. We continue to see return action to the 1.3850 area as a selling opportunity. If the retail sales don’t spark a big negative surprise (which of course possible due to weather related issues) this should also remain a USD/JPY positive environment going into next week BOJ (and Fed) meetings. In the UK, there are no eco data on the agenda. We expect sterling to remain weak, but probably there is no trigger available for the EUR/GBP currency pair to force the break above the 0.9150/54.

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