Bond market challenges ECB
|Selling pressure increased on the bond market towards the end of the week. Yields on government bonds rose noticeably in both the Eurozone and in the US. While yields in the US remained below the levels seen at the beginning of April this year, German government bond yields reached their highest levels in more than a year. In addition, the yield premiums of Italian government bonds widened. The extent of the yield increases was relatively small, but the credibility of the ECB could nevertheless be called into question by some market participants. The central bank had successfully countered the bond market sell-off in March. In addition to verbal interventions, the announcement of higher securities purchases under the PEPP program in the second quarter was decisive for this. This went well until recently.
Even though the ECB has not quantified its actions in any way, it is clear that the yield increases in February, as well as the latest ones, were not in its interest. The ECB aims to ensure favorable financing conditions depending on the inflation outlook. At the March meeting of the ECB Governing Council, these two were obviously not seen as being in harmony, and accordingly, higher asset purchases were announced. At the meeting just over a week ago, this course was confirmed. Since then, financing conditions have become even less favorable.
The ECB should aim to stabilize the market soon. Otherwise, in the worst case, the market could doubt the implementation of the monetary policy goals, although the necessary instrument for this is available with the PEPP purchase program. The consequence could be a wave of selling. Early intervention by the ECB is all the more important,as strong economic data should come from the Eurozone during the coming months, and thus the environment for the bond market will deteriorate.
Emerging markets: Does the current COVID-19 wave threaten the economy?
Unfortunately, there has been a dramatic increase in new infections in Brazil and especially in India in April due to local COVID-19 mutations. In contrast, China has managed to keep the infection under control. The containment measures necessary to prevent a worsening of the situation are likely to weigh on growth in Brazil and India in 2021. Against this background, the question of vaccination progress in emerging markets comes into focus.
So far, Brazil and China, with about 19and 17vaccine doses per 100 inhabitants, respectively, have been faster than Russia (13 vaccine doses per 100 inhabitants) and India (11 vaccine doses per 100 inhabitants). Given the high ongoing vaccination rate, the lead of Brazil and China will increase further in the coming weeks. Against this backdrop, Brazil should be able to sustainably control the incidence of infection in the coming months. In view of the large population, however, it will take much longer for India. The current situation shows how important it is for Europe and the US to quickly make vaccines available at a low cost on a global scale.
We do not expect any temporary economic weakness in Brazil or India to weigh on the upswing in the Eurozone. This is mainly because both countries, viewed in isolation, play a subordinate role for Eurozone exporters. For example, the share of Eurozone exports to India and Brazil in 2020 was 1% each. With an export share of around 3%, Russia's hesitant vaccination progress hurts somewhat more. In contrast, the US (15%) and China (8.5%) are by far the most important sales markets for the Eurozone economy.
Now that the upswing in both the US and China is in full swing, we expect the tailwind for Eurozone exporters to continue thanks to the importance of these two countries. Apart from this, we believe that the vaccination progress within the Eurozone is currently the decisive factor for the economy. Given the acceleration in the pace of vaccination, we expect sustained opening steps in May and June. Against this backdrop, we expect a dynamic recovery of the Eurozone economy from 2Q onwards, irrespective of the current negative developments in Brazil and India.
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