Market focus turns to rise in long-end yields

Market movers today

We may see a rebound in US retail sales for January following the pay-out of the second round of stimulus checks. US industrial production is also due today and consensus looks for an increase of 0.4% m/m.

FOMC minutes tonight should be scrutinized for a discussion on tapering of asset purchases. The Fed has signalled it is too early to speculate about it but there may be differing views on the FOMC.

In Scandinavia Sweden releases Prospera inflation expectations while we get the quarterly oil investment survey in Norway, see below.

The 60 second overview

Market sentiment: It has been fairly quiet overnight. While COVID-19 vaccine news and contamination figures generally continue to surprise positively market focus has turned to the latest rise in long-end yields lead by the US. While higher inflation expectations have supported reflation sensitive assets so far this year 10Y US real rates yesterday hit the highest level in 2021 - albeit at -0.93% they remain far below the pre COVID-19 levels. The rise in short-dated oil contracts has eased somewhat with WTI at the time of writing trading close to USD 60/bbl while Brent Crude remains above USD 63/bbl.  

Equities: What looked like another buoyant day at the opening bell yesterday turned out to be largely muted. Both US and European equities closed slightly lower, and Asian markets are mostly lower this morning. Coming off records the prior session, S&P ended down -0.1%, Nasdaq -0.3%, Russell 2000 -0.7% but Dow up 0.2%. The move higher in yields sparked another day of Value outperformance. Energy and Financials saw the largest gains, while defensives, health care and tech were the weakest. Markets appear to remain in a wait-and-see mode ahead of the Fed minutes, with futures indicating an unchanged opening in Europe and the US.

FI: The sell-off across the bond markets continued yesterday, led by the US 10y point which rose 11bp yesterday to temporarily reach 1.33%. Bund yields rose 4bp to stand at -0.345%, which is the highest level since June. In Europe, the long-end led the sell-off similar to previous days, with 10s30s EUR steepening 1bp to stand just shy of 40bp. The 10y US-German yield spread at 164bp is at the widest since prior to the COVID-19 crisis.

FX: Yesterday, we saw broad-based USD strengthening on the back of stronger-than-expected Empire manufacturing. This is different from last year, where positive US surprises were USD-negative by removing global deflation risks. EM currencies lost grounds yesterday falling both versus USD and EUR. EUR/GBP was not far from falling below 0.87 yesterday and is not trading far away from April lows. 

Credit: The pause of the risk-on sentiment also hit credit yesterday where CDS indices in particular sold off. iTraxx Xover widened to 243bp (+7bp) and Main to 47bp (+1bp) while HY was broadly unchanged and IG marginally wider.

Nordic macro and markets

In Sweden Prospera publishes its monthly inflation expectations survey at 08:00. As usual we (and the Riksbank) put most emphasize on the five-year horizon, where CPI and CPIF stood at a rounded 1.8% last time. We expect them to be more or less unchanged with a muted market response. 

In Norway, the Q1 oil investment survey will be published this morning. We have been assuming that oil investment will fall 6-7% this year due to a number of major projects being completed. It will be very interesting to see whether the combination of higher oil prices and changes to the taxation of the oil industry helps get new projects off the ground as early as this year, leading to a smaller drop in investment in 2021 than expected. We will also get the first indication of the level in 2022.