Volatility on stock markets remains elevated

Markets

Volatility on stock markets remains elevated with main European and US stock markets closing with gains yesterday. The EuroStoxx 50 bounced back from a bad start to even close around 1% higher. US benchmarks did even better (>2% intraday), but had to return some of those gains in the close after some (online) retail brokers restricted trading in some of the companies subject to this week's short squeeze. The decision came after they were forced to shore up their financial position to oblige to fluctuating requirements towards SEC net capital obligations and clearing house deposits. Yesterday's improved risk environment hardly affected FI or FX trading. Both proved to be an island of calm until the European afternoon/US morning eco releases. A huge jump in German inflation (1.6% Y/Y from -0.7% Y/Y; mostly driven by one-off factors like the reversal of a temporary VAT reduction, higher minimum wages, higher energy prices and a reshuffle in basket weightings) initially didn't get much attention. However, German Bunds followed US Treasuries south after US data not much later showed a stronger-than-expected decline in weekly jobless claims and a near consensus though somewhat meagre Q4 GDP print (4% Q/Qa). The US yield curve bear steepened with yield rising up to 3.1 bps (30-yr). Interestingly: underlying dynamics showed a 5bps rise in inflation expectations while US real yields lost 2 bps. Real yields are closing in on -1.1% again. The underlying dynamic helps explain the sudden faint in the dollar yesterday. EUR/USD closed around 1.2120. The German yield curve steepened as well, with intraday changes varying between -0.3 bps (2-yr) and +1.5 bps (30-yr). 10-yr yield spread changes vs Germany narrowed by up to 3 bps (Italy). Italian President Mattarella ends his round of consultations to end the political crisis tonight and could appoint a PM-designate as soon as tomorrow. Sterling continues to eke out by default gains against the euro, possibly because of the UK's head start in the vaccination campaign which contrasts with current difficulties in several EU capitals. EUR/GBP closed at the lowest level since May (0.8833).

Overnight risk sentiment is again very fragile. South Korea (-4%) and Japan (-1.5%) underperform. Chinese shares perform rather well even if the 7-day repo rate spiked to its highest level since 2015. The higher rate reflects tighter liquidity with the PBOC this morning only for the first time this week adding some cash to the system. Japanese weakness is at odds with better-than-expected labour market data and especially at odds with yen weakness. An overall strong dollar lifts USD/JPY to a new YTD high this morning above 104.50 and piercing the upper end of the downward trend channel since July. For the record we add the a stronger-than-expected rise in January Tokyo (ex fresh food) inflation (-0.4% Y/Y from -0.9% Y/Y). EUR/USD drifts back below 1.21 with core bonds gaining some traction. Today's eco calendar contains national EMU Q4 GDP data, US PCE December deflator (which can be derived from yesterday's GDP data) and Chicago PMI. The main market input will thus continue to come from general risk sentiment with inflation expectations and actual inflation developments gradually gaining more attention as well.

News Headlines

The EU will tighten the rules on the export of coronavirus vaccine shots today. It will require companies to obtain authorization to ship shots outside of the bloc. European Council Michel also ponders seizing control of the production if the measures would fail, according to an official. The stricter rules come after AstraZeneca said it will deliver a lot less doses to the EU, triggering suspicion AstraZeneca sold doses that were meant for the EU to the UK.

French GDP contracted 1.3% q/q in the final quarter of last year. That is less than the expected -4%. France's economy is still well below the level of 2019Q4 (-5% y/y vs. -7.6% expected). Private consumption (-5.4% q/q) weighed on growth as lockdown restrictions prevented the French from consuming as usual. Net trade was a positive (1.3% rise in imports dwarfed by a 4.8% advance in exports) as was fixed capital formation (2.4%).

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