Technical picture in the interest rate markets and the FX market will prevail

Markets

Markets last week showed a remarkable disconnect from a series of high-profile (US) data releases. A set of very strong US data, including higher than expected inflation, a strong beat in retail sales, promising confidence indicators and strong housing data weren’t enough to prevent a (technically) significant setback in US yields. The move slowed on Friday, but it’s much too early to already see it as a harbinger of the end of th e US bond rally. The US 5-y yield rose 1.5 bp, but other maturities changed less than 1 bp, holding on to previous decline. Also interesting, US 10-y real yield dropped further to -0.793, down about 10bp in a weekly perspective. German yields decoupled further from their US counterparts with the curve steepening and yields rising between 0.9bp (2-y) and 2.8 bp (10 & 30-y). The dollar remained in the defensive. EUR/USD retried Thursday’s test of the key 1.1990 resistance, but a clear break didn’t occur (close at 1.1983). The decline in de trade-weighted index (DXY) also slowed (close 91.56). USD/JPY finished the week below the 109 handles (108.80). An early session attempt of EUR/GBP to regain the 0.87 mark failed. The pair even more than reversed the earlier gain to close at 0.8658). The combination of a benign global yield environment and a soft dollar, was a fertile ground for global equities. The Dow and the S&P close at yet another record. The Euro Stoxx 50 convincingly cleared the 4 000 barriers, the strongest level since January 2008. 

This morning, Asian equity markets mostly join the WS rally on Friday with China outperforming (+1.85%) and Japan underperforming, even as Japan March trade data (exports + 16.1% Y/Y and imports + 5.7%) suggest a revival in international activity. New virus concerns and a relatively strong yen (USD/JPY 108.65) probably weigh on sentiment.The yuan is trading marginally stronger at USD/CNY 6.5260. The jury is still out, but the dollar shows tentative signs of bottoming with EUR/USD at 1.1965 and the DXY index at 91.63, even as US yields remain in the defensive (10-y at 1.57, -1bp).

There are no important data in Europe or the US today. Later this week, the ECB policy meeting (Thursday) and the EMU preliminary PMI’s are the focal point for trading. UK data will provide an in extenso update on the UK recovery. In the meantime, the technical picture both in the interest rate markets and the FX market will prevail. The US 10-y yield should soon regain the 1.58% ‘support’, to prevent further losses. In Europe, the German 10-y yield is nearing the -0.25% MT range top. Markets apparently prepare for a European catch up as the vaccination process is getting better traction. However, a new leap higher in German/European yields ahead of the ECB meeting probably isn’t evident. The interest rate divergence and a more balanced sentiment on the relative recovery prospects between the US and EMU, brought EUR/USD to the key 1.1990/1.20 area. Further gains might become less easy with the ECB probably reconfirming it’s intended to prevent an unwarranted rise in yields. Friday’s reversal in EUR/GBP suggests that 0.8731 (end February spike) remains a strong resistance.

News Headlines

Japanese exports surged by 16.1% y/y in March,their strongest print since November 2017. Shipments to China (and Asia in general) surged last month, but base effects exaggerated the headline figure. Japanese imports rose by 5.7% Y/Y in that same month, bringing the trade surplus to ¥663.7bn. Japan counts on export business to prop up GDP as the country faces new states of emergency in Tokyo and Osaka.

US National Security Adviser Jake Sullivan said on CNN’s “State of the Union” that there will be consequences for Russia if opposition leader Navalny dies. Last week, the US already slapped sanctions against Russia over alleged election meddling and misconduct related to the SolarWinds hack. The US also warned over the military built-up at the Ukrainian border. Separately, the EU released a statement on the Russian prisoner’s deteriorating health calling for access to medical professions he trusts and asking for his immediate and unconditional release. EU foreign ministers will follow up on the issue at today’s gathering. USD/RUB trades volatile around 76. 

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