Political uncertainty in Italy as well as supply of long – Dated bonds driving the European market

Market movers today

Another quiet day in terms of economic data releases with German ZEW survey data for January at 11:00 CET being the highlight of the day.

Italian PM Conte won the first vote of confidence yesterday in the Italian parliament's lower house. Today, he is facing a second vote of confidence in the upper house (Senate), where there is a risk that he will lose the vote and will be forced to resign. If PM Conte loses the vote today, it is set to put more short-term pressure on Italian government bonds and might lead to some safe-haven buying of Bunds.

The 60 second overview

Macro. We have seen a strong start for the markets in early January. However, the momentum seems to be fading for the equity market with rising infections as countries are hit by a second wave of COVID-19 despite vaccinations gathering pace. On top of this we have the upcoming earnings season as well as the negotiations regarding the fiscal stimulus plan from Biden. One of the few bright spots has been the Chinese economy, where the growth for 2020 surprised on the upside. Furthermore, comments from the Federal Reserve indicate that it is not in a hurry to tighten monetary policy. Hence, the risk of an early tapering from the Federal Reserve should be very limited. This should also limit the upside pressure on US Treasury yields.

There will be significant focus on the Bank of Japan meeting on Thursday given that a newspaper article on Saturday indicated that the BoJ may increase the band of +/-20bp, where 10Y JGB yield may fluctuate around 0%. A widening of the 'band' would most likely increase the volatility in the market and we do expect the BoJ wish to add volatility to the JGB market, as Japan is again hit by rising infections.

Yesterday, we published our Five Top Macro Questions for 2021. In the piece we discuss COVID-19, economic normalisation, inflation, fiscal and monetary policy and politics. We argue that while the US and Europe will continue to struggle with COVID-19 near term, we expect restrictions to be removed altogether when the vaccination process has progressed sufficiently. We argue that the US, Norway and Sweden will reach pre-coronavirus GDP levels this year, while it will probably take longer in Denmark, the euro area and Japan. We expect core inflation to remain low this year despite extraordinary fiscal policy support. We argue that economic policy will remain accommodative this year but that the Fed more seriously will start tapering talks in Q4 21. Last, but not least, we argue that this year is likely to be a quieter political year. For more details see the full piece.

Equities. European equities struggled for direction yesterday, with light trading volumes as US markets were closed for holiday. STOXX 600 closed up 0.2% (FTSE, DAX and CAC 40 all roughly unchanged). Value and Cyclicals led the gains, with autos, retail and banks among the sector winners. In contrast, defensive sectors closed lower with Utilities and Telecom worst off. US futures point to a rebound today, indicating an opening around 1%. Likewise, Asian equities are mostly advancing this morning, led by Hang Seng up 3.1%.

FI. The US markets was closed for the Martin Luther King holiday yesterday. However, the upcoming syndicated deals from France and EIB did put some pressure on the long end of the curve. Furthermore, more supply in the long end from both Portugal and Greece as well as the EU is likely to add some more pressure. However, we continue to stick to our -40bp to -60bp trading for 10Y German government bonds.

FX. EUR/USD was trading more or less unchanged with US markets closed yesterday. EUR/GBP moved higher yesterday morning but ended the day below 0.89. After an initial setback in yesterday's session NOK marked an afternoon comeback erasing most losses.

Credit. Credit markets barely moved yesterday. Both iTraxx Xover and Main were unchanged at 258bp and 51bp, respectively. While IG did widen 1bp, HY was unchanged too.