Steady USD and lower rates/yields

Market movers today

Today is a very quiet day. The most important events are the ECB, Norges Bank and the Bank of Japan meetings on Thursday, although we do not expect any of the central banks to do much else than taking stock.

On Wednesday, President-elect Joe Biden is inaugurated. It is unlikely to be anything than a non-event but it is a signal that changes are coming in the US.

On Friday, we get preliminary PMIs for January from the euro area, the US, Japan and the UK.

The 60 second overview

China. This morning, GDP numbers for the Chinese economy showed growth of 2.3% in 2020 versus expectations of 2.1%. However, the picture in the Asian equity markets this morning is mixed as discussed in the equities section below.

European politics. It has been quite eventful on the European political scene since Friday. In Germany the new CDU party leader Armin Laschet was elected with a 52-48% split in the second-round elections ahead of Friedrich Merz. Armin Laschet is set to continue the 'Merkel-era policies' and is a consensus building candidate, and a pro-EU centrist. In March the CDU and CSU party will decide whether he or Marcus Söder (Leader of CSU and Minister President in Bavaria) will be the CDU/CSU Chancellor candidate for the September parliamentary elections. On the EU political front both a Laschet and Söder-led government supported by the Greens would be a pro-EU constellation, although the gravitas of a Merkel-led German EU and domestic policy is a very challenging task to replace.

In the Netherlands, PM Rutte and his government resigned due to a systematic failure with childcare benefits. PM Rutte will continue to head a care-taker government with parliamentary elections set for 17 March. On the EU political front PM Rutte has been very hawkish and part of the Frugal four group, notably during the negotiations about the Recovery Fund.

In Italy, PM Conte faces two confidence votes this week. Today's vote in the chamber of deputies should be 'easy' given they have a clear majority there while the outcome of tomorrow's Senate vote is a closer call. We expect Conte to obtain the simple majority needed to stay PM, but the political negotiations in the coming months will become challenging. A no-confidence vote would effectively lead to his stepping down.

The near-term market drivers on the political scene should be found in Italy (while the German and Dutch changes are a risk to the medium- to longer-term EU policies). We expect the Italian turmoil to be short-lived as this is more an internal political issue than a confrontation with EU/ECB. We do not expect the ECB to step in and support Italian government bonds extraordinarily.

Webinar on US economic outlook, the USD, equities and US rates. Today, we will host a webinar discussing the Fed, US rates markets and the impact on FX and equity markets or rising US yields.

Equity markets finished lower in the final session for the week. In the US, S&P 500 closed down -0.7%, Nasdaq -0.9%, Dow -0.6% and Russel -1.5% but outperforming for the week. Sector performance was in classic risk-off mode, with Energy, Financials, Industrials and Materials the biggest laggards and Healthcare and bond proxies like Utilities gaining. This concluded a cautious week with Value-intense regions like Europe and Japan outperforming and defensive sectors the relative winners. Asian markets are mixed this morning, with China leading after strong GDP data, but Japan and South Korea lower. US markets are closed for holiday, but European futures indicate another muted opening.

FI. 10Y US Treasury yields declined on Friday as the market is yet to decide on whether the fiscal stimulus, rise in inflation expectations and risk of Fed tapering is enough to outweigh overseas demand for US Treasuries as well as an uncertain economic outlook due to the coronavirus. For more on this please listen to our webinar on the US economy as mentioned above. It is again going to be a busy week in the European fixed income markets with expected issuance in European government bonds and EU social bonds of more than EUR30bn. However, so far the significant issuance has easily been absorbed and we do not expect this to change this week.

FX. EUR/USD continued its correction moving towards the 1.20 mark on Friday, although it appeared to be driven by the broad-based equity sell-off. EUR/SEK is now trading closer to our 1M 10.10 forecast and NOK ended last week slightly on the back foot amid souring risk appetite. On Friday, we published our new FX forecasts.

Credit. Though CDS indices sold off on Friday, when Xover widened to 258bp (+7bp) and Main to 51bp (+2bp), cash bonds only saw small movements, with both IG and HY broadly unchanged.