Inauguration day in the US

Market movers today

Today's key event is President-elect Joe Biden's inauguration. Normally this is just a formality but the concern is whether there will be another riot on the back of the inauguration. This, however, should not cause any major market reaction, in our view. We still think a more stimuli-friendly administration is supportive for risk sentiment.

In terms of economic data releases, today is another quiet day. Riksbank's Skingsley gives a speech and BoE Governor Andrew Bailey answers questions from the public.

Overnight, we think the Bank of Japan meeting will be fairly uneventful. The Bank of Japan is set to prepare a policy review that is scheduled for publication in March.

Italian PM Conte won the vote of confidence in the Senate yesterday. We expect more spread tightening between Italian and German government bonds.

The 60 second overview

US. New Treasury Secretary Janet Yellen will not pursue a weaker USD like the previous administration. Instead she will leave it to the market. She will be facing some negotiations with the Republicans regarding Biden's USD 1900bn fiscal stimulus plan, but given that the Democrats hold the majority in both houses, we expect a very large fiscal stimulus package targeted at small businesses and unemployed people in order to get 'the most bang for the buck' according to Yellen. A large package financed primarily by issuing Treasuries is to some extent already priced in and with no policy action from the Federal Reserve, the upside on Treasuries is capped.

Italy. Last night Italian PM Conte won the support in a no-confidence vote with 156 votes versus 140 against (16 abstentions and nine senators did not attend). For Conte to have an outright majority 161 votes are needed to pass some key legislations. This means that, as expected, the Italian political turmoil should fade into the background again. This will be supportive for the BTP-Bund spread after the widening pressure in the past week.

A story on Bloomberg indicates that ECB is 'silently' capping the country spreads in the eurozone, which could explain the modest spread widening between Italy and Germany during the political uncertainty recently in Italy. One source said that the ECB has a specific target for the 'variance' in the spreads.

Japan. The Bank of Japan (BoJ) finishes a two day policy meeting early Thursday morning. There was a story out in the weekend in local media that the BoJ might widen the 40bp tolerance band on the 0% 10-year JGB target, which caused a spike in long-dated JGB yields. We do not expect any policy changes tomorrow, though. In December, funding measures were extended and a policy review was kicked off; the results of which will be released in March. Here the BoJ will look for ways to increase the sustainability of its policies without making it look like a retraction from current easing levels. A widening of the tolerance band could be one way to go along with adjusting its ETF purchases. The BoJ currently owns about 80% of the ETF market and the Japanese stock market has ballooned by almost 40% in the recent year.

Equities. Tuesday saw the roles reverse as European markets closed mostly lower, while US pushed higher after being closed Tuesday. S&P 500 advanced 0.8%, Nasdaq 1.5%, Dow 0.4%, and Russell 2000 1.3%. Among sectors, Energy stood out, coupled with growth sectors (Communication services and Tech) ahead. Defensives and Value names trailed, including Financials, Industrials and Materials. Yields were little changed, with the US 10 year yield at 1.1% this morning, while oil continued its drift higher. Volatility is still elevated, with VIX settled above 23. US futures indicates a muted or slightly higher markets at best this afternoon. Likewise, Asian markets are mostly higher with South Korea leading and Nikkei lagging.

FI. The US Treasury market was kept in a tight range yesterday with 10Y Treasuries ending more or less unchanged from the opening. A similar move was seen in the 10Y German government bonds, which is also caught in tight range. In the short term we expect this continue for some time.

FX. EUR/USD rose back above 1.21 yesterday supported by better risk sentiment. EUR/GBP once again ended the day slightly below 0.89 after trading above during the day. Not much action in EUR/NOK, while EUR/SEK ended the day at 10.12 after a dip to 10.09 intraday.

Credit. Sentiment improved in credit markets yesterday where both CDS indices and cash bonds tightened. Xover closed in 257bp (-2bp) and Main in 50bp (-1bp) while HY and IG cash bonds closed 2bp tighter and 1bp wider, respectively.