Will the announcement of big stimulus be enough to block the corrective decline in US yields?

Markets

Media headlines yesterday focused on the impeachment procedure against US president Trump in the US House of Representatives. For markets there was little high profile news to react to. After a cautious start, the S&P (0.23%) and the Nasdaq (0.43%) closed with modest gains as was the case for most European indices. Core bonds extended their corrective rebound in the wake of a strong US 10-y auction on Tuesday evening. Yesterday's US Treasury $24 bln 30-y bond sale also met very strong investor demand, supporting the bid for US bonds. US yields dropped between 0.2 bps (2-y) and 5.6 bps (30-y). The German curve bull flattened with yields declining between 1.4 bps (2-y) and 5.7 bps (30-y). Intra-EMU spreads widened marginally. There was no noticeable underperformance of Italian BTP's despite the political crisis (Renzi withdrew its ministers from the coalition). The (corrective) USD rebound resumed even as US LT yields declined substantially. EUR/USD closed at 1.2157 (from 1.2207). DXY closed at 90.35.

This morning,global (equity) markets are supported by a CNN report that US President Biden might announce a new stimulus package worth about $2 trillion. The plan was said to include direct payments to American families and state and local funding. US LT yields are rebounding about 2 bps on the report after yesterday's setback. The dollar again profited, albeit modestly, from higher US yields. The trade-weighted dollar is changing hands in the 90.35. EUR/USD is changing hands in the 1.2150 area. USD/JPY returned north of 104. Asian equity indices mostly show modest gains, with Korea and China underperforming. The Chinese yuan is trading little changed (USD/CNY 6.4675 area) even as the country this morning reported a record monthly trade surplus in December.

Today's calendar is not that much different from earlier this week. There are again few data in EMU. The US jobless claims (expected little changed at 789 000) probably are the only data with (intraday) market moving potential. Several Fed members are again scheduled to speak, including Fed chair Powel attending a webinar on economics. Markets are also looking forward the President Biden's stimulus plan. Will the announcement of big stimulus already be enough to block this week's corrective decline in US yields? On the dollar, the jury is still out. Of late, the prospect of additional stimulus and a rebound in US real yields tentatively supported a (ST/corrective?) USD comeback. The EUR/USD 1.2011 area remains next important reference on the technical charts. EUR/GBP yesterday dropped temporaril y below 0.89, but a test of the 0.8865 support didn't occur. Markets still are pondering the chances of negative UK policy rates after recent comments of BoE's Bailey. A stabilization in UK ST yields might also cap a further sustained sterling rebound.

News Headlines

Swiss campaign group "Friends of the Constitution" (FotC) easily met the required bar of 50 000 signatures (86 000) needed to initiate a nationwide referendum. Topic of debate: legally keeping the government from imposing news lockdowns and freezing public life. FotC argues that crisis management cannot be done without the will of the people. The Swiss government long kept a wait-and-see approach, but has been gradually stepping up lockdown measures since the second half of December. The earliest referendum date is somewhere in June.

Chinese December trade data beat forecasts. Both exports and imports (in USD terms) rose faster than expected. Exports rose 18.1% Y/Y in December with imports adding 6.5% Y/Y. The trade surplus reached a record high $78.17bn. Exports grew 3.6% over the full year of 2020 and imports fell 1.1% over that period. Resilient trade helped China into (likely) positive growth figure in the Covid calendar year.

The Russian finance ministry announced that it would buy foreign currency worth almost $100 mn every day between January 15 and February 4. It's a complete U-turn given that they have been a buyer of Russian roubles since March when the start of the Covid pandemic and tailspinning oil prices caused immense pressure on the currency. The Russian currency has been stabilizing since Q4 2020 with hope on economic revival and bouncing oil prices helping to put a floor below the rouble.

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