Risk appetite under pressure as COVID -19 fears return

Market movers today

UK: March inflation figures.

Bank of Canada: Monetary policy meeting. It is widely expected that the policy rate will be kept unchanged at 0.25%. But we might see more upbeat rhetoric.

The 60 second overview

Virus concerns: Risk appetite has been under pressure the last 24 hours among other things as the number of Covid-19 infections rise, especially in Asia. The WHO said that the number of cases are rising in all regions except Europe. Especially southeast Asia is hit hard, with India seeing a wave of new cases. In Japan, Tokyo and Osaka have asked the government to declare a state of emergency from April 29 to May 9 and introduce stricter restrictions to contain the virus ahead of the Olympics in three months' time. The news has weighed heavily on Nikkei this morning and the index is down more than 2%.

Johnson and Johnson vaccine: It is not all bad virus news. Yesterday, the EU drug regulator said that the benefits of the Johnson and Johnson vaccine outweigh the risks of blood clots. The latter is seen as a rare side effect. It is now up to the EU governments and local regulators to make their own decision. The US authorities are expected to follow with their own ruling on Friday after the Johnson and Johnson vaccine was put on hold last week. Johnson and Johnson have said that they will resume shipments to the EU, Norway and Iceland.   

German politics: Yesterday, Markus Söder officially congratulated Armin Laschet and endorsed him as the chancellor candidate of the CDU/CSU collation at the September election. After the defeat in the CDU executive committee Monday night it was unclear whether Söder would continue his campaign. However, Laschet will face a tough election in just five months' time. He seems to lack the electoral appeal of Söder and his CDU/CSU coalition is losing out against the Greens in the polls, where the lead over the Greens has narrowed further this year. The Greens might also see renewed support after the uneventful election of the 40-year-old Annalena Baerbock. 

Another G10 central bank turning less dovish? While Bank of Canada (BoC) is widely expected to leave rates unchanged markets pencil in a decent likelihood of a reduction in its government bond QE program from CAD 4bn to CAD 3bn. The economic recovery has so far been much faster-than-expected by Macklem and co. yet we still think it is too early for BoC to firm the forward guidance on rates. Going into the meeting, the central bank has indicated rates will not be raised until all economic slack has been absorbed, which in the last monetary policy report was not projected to happen before 2023.

Equities: Equities lower yesterday in a classical risk-off session with cyclicals and small cap underperforming. Banks and energy together with many of the reopening trades sold off without any single factor to blame for the lack of risk appetite. After four weeks with strong performance, it was time for some consolidation as we have seen so many times before. VIX in another move higher ending just below 19. US equities closed just shy of day low with Dow -0.8%, S&P 500 -0.7%, Nasdaq -0.9% and Russell 2000 -2.0%. Asian equities are following suit this morning with indices down across the region. Futures in Europe are in green while US futures are once again slightly negative. 

FI: US and European bond yields decline on the back of the "risk-off" sentiment in the market, where equities declined. There were no key economic data releases yesterday, but the gross buying from the ECB in the PEPP rose by EUR 28bn even though the net purchase rose by only EUR 16bn, as there were EUR 12bn in redemptions.

FX: Yesterday's shift in global risk appetite left a clear mark on NOK with EUR/NOK rallying sharply above 10.05 during the US session. EUR/GBP moved slightly higher on a similar theme. Noteworthy, EUR/USD remains remarkably stable despite the weak risk sentiment.

Credit: Credit markets were in a decisive risk-off mode yesterday where iTraxx Xover widened 6bp (to 254bp) and Main 1bp (closing in 51bp). HY bonds closed 5bp wider on average while IG was broadly unchanged.