After last week's global bond rout, central banks weren't taking any chances, and as soon as the overnight session started yields plunged first in Australia and then everywhere else after the RBA doubled the amount of daily QE to enforces its YCC, sending 10Y Australian bond yields plunging by as much as 32bps, the biggest drop since last March. Other joined in verbally, with the ECB saying said it will not tolerate higher yields even though the Fed has for now said it sees little cause for concern in the rapid run up (BofA disagrees and expects Powell to calm markets as soon as this week). Meanwhile, a barrage of sellside reports over the weekend, sought to reassure investors about the risk of a breakout in inflation, with the likes of JPM and Goldman all saying that fears of a rapid increase in consumer prices are overblown (although in case they aren't, Goldman conveniently provided a list of companies that will be hammered if yields continue to rise).
In any case, S&P500 futures jumped more than 1% on Monday thanks to the stabilization in bond yields and as Johnson & Johnson’s newly approved COVID-19 vaccine and progress in a new $1.9 trillion coronavirus relief package fueled optimism over a swift economic recovery. At 07:30 a.m. ET, Dow E-minis were up 297 points, or 0.954% and S&P 500 E-minis were up 40.00 points, or 1.05%. Nasdaq 100 E-minis were up 167.50 points, or 1.29%
The risk advance was broad, with stocks tied to economic reopenings and faster growth notching some of the biggest gains. Futures on the small-cap Russell 2000 Index outperformed the Nasdaq 100 Index.
In the latest positive covid news, Johnson & Johnson began shipping its single-dose shot vaccine after it became the third authorized COVID-19 vaccine in the United States over the weekend. As a result, shares of "Back to normal" stocks such as cruise liner and hotel operators, and carriers including Carnival Corp, Royal Caribbean Cruises Ltd Hilton, Delta Air Lines Inc and American Airlines gained between 1% and 5% premarket.
The reflation trade also got a boost after Joe Biden scored his first legislative win as the House of Representatives passed his $1.9 trillion coronavirus relief package early Saturday. The bill now moves to the Senate. Sectors that stand to benefit more from an economic rebound outperformed, with Bank of America, Citigroup and JPMorgan jumping between 1.3% and 2.2%, and energy firms Chevron and Exxon Mobil between 1.6% and 3.5%.
Tech stocks were also broadly higher, with Apple, Microsoft, Facebook and Amazon.com all rebounding between 1.3% and 2.3% on Monday.
Europe’s Stoxx 600 Index rose the most in three months, although after rising as much as 1.5%, it has since retraced gains to 1.25%. The FTSE 100 outperformed, rallying as much as 2% in early trade. Retailers, travel and mining stocks lead broad based gains across all sub-sectors. Europe’s Stoxx 600 travel & leisure index was up 2.4% as of 8:37am in London trading, extending last week’s 2.4% increase; European travel and leisure outperformed almost all other industry subgroups on Monday, led by carrier IAG, tour operator TUI and cruise ship company Carnival amid wider optimism in equity markets and hopes for a return to normality in a sector that’s been hard hit by the Covid-19 pandemic.
Earlier in the session, Asian stocks bounced back from Friday’s tumble as technology giants climbed and expectations rose for changes in Hong Kong’s benchmark index. The MSCI Asia Pacific Index was up 1.5%, the best performance in a month, led by gains in Japan. Tencent was the biggest boost to the MSCI Asia Pacific Index, which rose 1.5 after posting its worst drop in 11 months on Friday. SoftBank Group gained after it reached a settlement with WeWork and its co-founder Adam Neumann. The Hang Seng Index climbed 1.6% after plans were announced to expand the gauge to 55 members and eventually to 100, from 52 currently. Hang Seng Indexes is also expected to confirm later Monday whether it will undertake a major revamp that would make it easier to include new stocks. Key equity gauges also climbed more than 1% in Japan, Australia, China, Vietnam, Indonesia, India and Philippines. Markets in South Korea and Taiwan were closed for holidays.
Naturally, all eyes were on bonds this morning, with the Treasury long-end unwinding most of Friday’s late month-end-led gains while belly of the curve holds its sharp outperformance during Asia session in choppy market conditions and poor liquidity. Long-end yields were higher by ~5bp on the day, 10-year by ~3bp at ~1.43%, 5-year is lower by ~1bp, steepening 5s30s by nearly 6bp; 2s5s30s fly is richer by 7bp, 2s5s10s by 5bp.
Over the weekend, strategists recommended long positions in belly and dip-buying, arguing that pricing of Fed rate hikes is too aggressive. No coupon supply due this week, which features appearance by Fed’s Powell Thursday and February jobs data Friday. European bonds rallied amid speculation over ECB buying and in a catch-up effect with Treasuries
Indeed, after a week of intense volatility in bond markets, investors were shaking off concern about the effects of rising borrowing costs and ready to once again buy risk assets. The big question, however, remains - how central banks will react to rising bond yields. While policy makers at the European Central Bank have said they won’t tolerate higher yields if they undermine the economy, the institution will publish its latest bond-buying figures later today. A significant increase in purchases would show they are backing their words with action.
"With a lot of the move in yields due to the improving growth outlook and reopening prospects, risk appetite is holding up," said Esty Dwek, head of global strategy at Natixis Investment Manager Solutions. “The pace and scale of the move in yields is more important than the absolute level, suggesting that as long as the move is gradual, risk assets should be able to absorb them.”
In FX, the Bloomberg Dollar Spot Index was steady and the greenback was mixed versus its Group-of-10 peers; 10-Treasury yields rose by 3bps in Europe after Friday’s plunge. The euro fell from the European open and is set for its biggest 2-day drop versus the dollar since September. The yen fell to 106.74 per dollar, its weakest level since August last year. Bank of Japan officials are still prepared to stem any risk of Japan’s benchmark bond yield rising too much ahead of a policy review later this month and could even act before it hits 0.2%, according to people familiar with the matter. Commodity currencies, led by the Canadian dollar, gained as stocks advanced and oil prices rebound ahead of a key OPEC+ meeting this week that may see some supply returned to a fast-tightening market.
Emerging-market currencies fluctuated between gains and losses, following their worst weekly drop since September. The lira was the best performer among peers, after leading global currency losses last week, as Turkey’s fourth-quarter gross domestic product report showed the economy picked up last quarter. MSCI Inc.’s emerging-market currency index climbed and fell as much as 0.2% before trading little changed. It’s an “encouraging signal for emerging-market currencies” that the 10-year U.S. Treasury yield has pulled back to the resistance area of 1.4% to 1.44%, said Piotr Matys, strategist at Rabobank in London. “As long as this area holds in the coming days, the selling pressure on the emerging-market currencies should ease.”
Meanwhile, commodities marched higher. Oil futures in New York rose toward $63 a barrel after losing 3.2% on Friday. The OPEC+ alliance is due to meet on Thursday and expected to loosen the taps after prices got off to their best ever start to a year. But it’s unclear how robustly the group will act, with the Saudi Arabian energy minister calling for producers to remain “extremely cautious.”
In crypto, Bitcoin rebounded strongly to trade around $47,000 in a rebound from last week’s steep losses, which saw the crypto plunge over the weekend. In the latest potential catalyst, billionaire hedge fund manager Dan Loeb said "I’ve been doing a deep dive into crypto lately."
I’ve been doing a deep dive into crypto lately. It is a real test of being intellectually open to new and controversial ideas. Culturally I compare bridging the crypto world with the old as akin to finding a portal @chbetween two distinct worlds in the multiverse. https://t.co/LqWwfIxOyd— Daniel S. Loeb (@DanielSLoeb1) March 1, 2021
Looking at today's calendar, the U.S. February manufacturing PMI is 9:45 a.m. with ISM Manufacturing at 10:00 a.m. New York Fed President John Williams and Fed Governor Lael Brainard speak later, and three regional presidents are on a panel on racism and the economy held by the Minneapolis Fed. Zoom Video Communications Inc., NIO Inc. and Novavax Inc. are among the companies reporting results. CERAWeek begins.
- S&P 500 futures up 1.2% to 3,854.25
- Stoxx Europe 600 gains 1.6%
- MXAP up 1.4% to 209.53
- MXAPJ up 1.3% to 702.31
- Nikkei up 2.4% to 29,663.50
- Topix up 2.0% to 1,902.48
- Hang Seng Index up 1.6% to 29,452.57
- Shanghai Composite up 1.2% to 3,551.40
- Sensex up 1.4% to 49,770.22
- Australia S&P/ASX 200 up 1.7% to 6,789.55
- Kospi down 2.8% to 3,012.95
- Brent Futures up 1.3% to $65.25/bbl
- Gold spot up 0.8% to $1,748.19
- U.S. Dollar Index up 0.2% to 91.024
- German 10Y yield fell to -0.301%
- Euro down 0.3% to $1.2033
Top Overnight News from Bloomberg
- A new market consensus has quickly formed after last week’s fire sale in bonds -- rate-hike expectations have become too aggressive and it’s time to buy. Swap traders now see the Federal Reserve raising rates in March 2023, with more than 90 basis points of increases priced in by the end of 2024. A number of strategists have come out saying that’s too much and investors should buy short-maturity bonds to fade the move
- In the showdown between traders and central bankers over rising bond yields, the Bank of England is aligned more with the relaxed views of the U.S. Federal Reserve than peers in Asia and Europe that are trying to rein in markets
- The ECB will reveal on Monday how serious it is about countering rising bond yields. After days of top policy makers saying they won’t tolerate higher yields if they undermine the economy, the institution will publish its latest bond-buying figures at 3:45 p.m. Frankfurt time. A significant increase in purchases would show they are backing their words with action
- Wall Street’s most bullish economic forecasts hang on a simple prediction: everybody will flood back soon to their local gyms, bars and yoga studios as if the pandemic was in the past
- Chancellor Angela Merkel faces further pressure to lay out a path to ease Germany’s coronavirus lockdown after Finance Minister Olaf Scholzbecame the latest senior official to call for a quicker reopening of Europe’s largest economy
- Euro-area manufacturers are reporting the steepest increases in their input costs in almost a decade as the coronavirus disrupts supplies, and are passing at least some of that burden onto customers. Rising demand for goods is running into virus restrictions that are causing delivery delays and pushing up prices for raw materials and components, according to an IHS Markit survey
- Bitcoin is nursing losses after its worst weekly plunge in almost a year and on one view its longer term outlook could be even worse because of environmental concerns and tightening regulations
A quick look at global markets courtesy of Newsquawk
Asian equity markets gained with the regional bourses picking themselves up from Friday’s losses as the bond market rebounded from last week's turmoil and with sentiment encouraged by an improving COVID-19 situation after JNJ's vaccine approval and a slower pace of infections over the weekend. ASX 200 (+1.7%) was led higher by notable outperformance in tech after the easing of yields spurred flows back into the sector and into growth stocks, with property names also boosted after CoreLogic data showed the sharpest increase in house prices since 2003. Nikkei 225 (+2.4%) coat-tailed on the rebound in JPY-crosses and after PM Suga announced the removal of the state of emergency in 6 prefectures effective yesterday, with the emergency declaration set to be lifted for the Greater Tokyo area on March 7th. Hang Seng (+1.6%) and Shanghai Comp. (+1.2%) were also positive but with gains tempered after Chinese Official Manufacturing PMI (50.6 vs. Exp. 51.1) and Caixin Manufacturing PMI (50.9 vs. Exp. 51.5) both missed expectations but remained in expansion territory and as tensions continued to linger with the US set to impose Trump-era rules aimed at threats from Chinese tech, while NYSE will delist CNOOC’s American depository shares on March 9th to comply with an executive order that was issued during the prior US administration. There were also comments from Secretary of State Blinken who condemned the detention and charges against pro-democracy advocates in Hong Kong and called for their immediate release, while focus in Hong Kong turns to the outcome of the public consultation for reconstruction of the Hang Seng Index which are due today and could result in an increase of constituents, cap on weightings for individual companies and a fast-track of new listings with the press briefing set for 08:30GMT/03:30EST. Finally, 10yr JGBs traded higher as yields cooled off from last week’s surge but with upside capped by the lack of haven demand and with the BoJ present in the market today for just JPY 470bln, mostly concentrated in the 3yr-5yr maturities, while the Australian 10yr yield declined around 20bps due to a proactive RBA which announced to purchase AUD 4.0bln of government bonds.
Top Asian News
- Myanmar Court Charges Suu Kyi With Incitement Amid Protests
- Asian Stocks Rebound From Selloff on Tech Gains, Hang Seng Moves
- China Developers’ Dollar Bonds Slide: Sinic Sees Record Drops
- Indonesia Says Govt to Bear VAT on Home Sales to Push Growth
European equities (Eurostoxx 50 +1.3%) have kicked the week/month off on a firmer footing as investors cheer the US approval of the single-dose Johnson & Johnson vaccine, eye stateside stimulus developments and yields stabilise from recent advances in what is a particularly busy week of Fed speak and tier-1 data releases. From a European-specific standpoint, investors will continue to assess commentary from ECB officials given the pushback from various members of the governing council last week with Stournaras of Greece the most explicit in his desire to temper the recent increase in yields. Comments from the ECB, in part stood in contrast to those of the Fed with the latter more sanguine about the recent increase in yields; any further divergence in the assessment of recent moves could lead to differing performances for the two regions. In terms of the broader tone of the market this morning, the market has a slight pro-cyclical feel to it with the e-mini Russell (+2.0%) outperforming the tech-heavy Nasdaq (+1.4%). A similar trend can also be observed in Europe with retail, travel & leisure and basic resources some of the best performers in the region with these sector part of the typical “reopening play”. Stock specific news stories have been on the lighter side this morning; however, in the UK homebuilding names are a clear source of strength amid reports that Chancellor Sunak is set to announce a mortgage guarantee scheme to assist those with small deposits in an attempt to bring back 95% mortgages. Danone (+2.0%) is firmer on the session amid reports the Co. is working on a sale of Mengniu, their Chinese dairy unit, valued at circa EUR 1.8bln and could see a capital gain of EUR 1bln, according to sources. Postal names are also a pocket of strength in Europe after PostNL (+4.5%) reported better-than-expected earnings.
Top European News
- Bank of England Aligns With the Fed Over Rout in Bond Market
- Danone Prepares to Sell $1 Billion Stake in China’s Mengniu
- Heathrow Imposes Passenger Charges to Cover Pandemic Costs
- ECB to Show Whether Pledge to Cap Yields Is More Than Just Talk
In FX, the Aussie and Kiwi are both off overnight highs vs their US rival, but holding up relatively well given the fact that the Greenback is on the rebound, and in index terms has eclipsed last Friday’s 90.975 peak at 91.127. Aud/Usd is keeping sight of 0.7750 and Nzd/Usd likewise near the 0.7250 half round number against the backdrop of pretty marked debt yield and curve compression that has boosted broad risk appetite, but also capped divergence between US Treasuries and bonds with larger premiums, such as the Aussie 10 year that recoiled 27 bp after RBA intervention via Aud 4 bn+ QE on the eve of Tuesday’s policy meeting. Meanwhile, the Aud/Nzd cross has rebounded to pivot 1.0650 following another snap lockdown in Auckland, NZ, but will likely be capped indirectly as a hefty 2.2 bn option expiries reside in Aud/Usd at the 0.7770 strike before attention switches to NZ Q4 terms of trade tonight. Elsewhere, the Loonie is straddling 1.2700 with assistance from firm crude prices ahead of OPEC+, and awaiting Canada’s Q4 current account and manufacturing PMI for some independent impetus, while the DXY is now eyeing nearest resistance in the form of a 91.228 high from February 8 in advance of US construction spending, the manufacturing ISM and a host of Fed speakers.
- GBP - Sterling is also displaying a degree of resilience against its US counterpart around 1.3950 in wake of an upward tweak to the final UK manufacturing PMI and mixed BoE data, but the Pound has started the new month back in the ascendency vs the Euro after the late February technical correction as the cross pulls back sharply from circa 0.8731 to sub-0.8650.
- CHF/EUR/JPY - Somewhat conflicting impulses for the Franc, as Swiss retail sales dipped in January after an upward revision to the previous month, but February’s manufacturing PMI beat expectations and accelerated through 60.00. Meanwhile, latest sight deposit balances infer no intervention from domestic banks on behalf of the SNB, but IMM data shows that specs re-established long positions last week. Usd/Chf is hovering above 0.9100 and Eur/Chf is meandering between 1.0988-64 even though the Euro has lost 1.2050+ status vs the Dollar after testing 1.2100, but failing to breach the psychological level or derive much traction from broadly better than expected Eurozone manufacturing PMIs and firmer German state CPIs. Perhaps Eur/Usd is conscious about more dovish guidance from the ECB pre-comments via several GC members including President Lagarde, and the same goes for Usd/Jpy following sourced reports suggesting that the BoJ could defend its YCC ranges before 10 year cash gets to 0.2% and cap any further spike to 0.3% ahead of its strategic review. Note also, the Yen may have option expiry interest in mind as it trades within a 106.37-74 range and mostly below 2.3 bn at 106.55-45, as an additional 1.8 bn lie from 106.25-20.
In commodities, WTI and Brent front-month futures are firmer on the session but off best levels during early European trade. The complex has seen upside this morning which is in-fitting with the overnight APAC session and broader market sentiment. Moreover, oil prices may have derived support from the US House passing a USD 1.9trln stimulus bill which has lifted investors risk appetite. Alongside this, the approval of Johnson & Johnson’s one shot COVID-19 vaccine has buoyed the economic outlook. Overall, the fundamentals surrounding commodities remains the same with vaccine progress and the OPEC+ meeting, on Thursday, the focusses. Regarding price action, it is anticipated that prices will follow the general market sentiment until the OPEC+ meeting, where a plethora of viewpoints are held and discussions into whether as much as 1.5mln BPD of crude will go back in the market are expected to be conducted. Analysts at OCBC have stated, “if the combined OPEC+ increase does not exceed 500,000 bpd, that will be bullish for prices” and ING analysts said “OPEC+ will need to be careful to avoid surprising traders by releasing too much back into the markets” as there is a large amount of speculative money in oil, so they will want to avoid any action that will see looking for an exit. WTI resides towards the low USD 62/bbl mark (vs high USD 62.92/bbl) and Brent low USD 65/bbl (vs high USD 65.93/bbl). Elsewhere, precious metals are modestly firmer in-spite of ongoing USD strength but remain in proximity to recent lows given last week's sell off; spot gold +0.6%, just below USD 1,750/oz and spot silver USD 26.90/oz. Turning to base metals, they aptly abide by the same sentiment and see gains across the board with LME copper +1.3%. On copper, the head of the world’s biggest listed producer, Freeport, has stated the rise in price is no temporary spike and expects it to persist; due to its mass use and the expected 'greening' of the economy.
US Event Calendar
- 9:45am: Feb. Markit US Manufacturing PMI, est. 58.5, prior 58.5
- 10am: Jan. Construction Spending MoM, est. 0.7%, prior 1.0%
- 10am: Feb. ISM Manufacturing, est. 58.6, prior 58.7
- 10am: Feb. ISM Employment, prior 52.6
- 10am: Feb. ISM New Orders, est. 60.0, prior 61.1
- 10am: Feb. ISM Prices Paid, est. 80.0, prior 82.1
DB's Jim Reid concludes the overnight wrap
Welcome to Spring here in the U.K.. With the sudden improvement in the weather a pollen bomb has exploded and hay fever is well and truly impacting me at the moment. Usually at this time of the year I can escape the pollen by going to heavily polluted London in the week to ease my symptoms but that’s not an option this year of course. I’m triple dosing my tablets and my eyes are still itching like crazy and they are struggling to open up properly this morning. Anyway that’s my excuse for any errors below!
Markets were pretty allergic to the fun and games in rates markets last week but before we go into that, in the next 30 minutes we’ll put out our monthly performance review. Over the month equities just about held onto their gains (but with a much more negative second half). Yields sold off but commodities such as Oil and Copper surged. See the full report in your inboxes very soon for more.
Onto the current market conditions. My theme this year has been that it’s going to be very complicated for financial markets with volatility high. The forces working in both directions (high growth and stimulus versus inflation and higher yields) are huge and both sides will dominate for periods causing us to move between extremes. There is little doubt that US growth is going to be very strong with our economists upgrading Q4/Q4 2021 growth to 7.5% last week (see here). With inflation this could mean nominal GDP getting close to 10%. The last time we were in double digits was the early 1980s. With these sort of numbers it has always seemed unlikely that bonds would have a calm low yield, low vol year. Even if growth and inflation eventually roll over in 2022 and 2023 we are not going to know for a few quarters yet. In addition without knowing who is going to win the mid-terms we can’t be sure that the Democrats aren’t going to dip into the fiscal well a few times more before the next Presidential election. When I talked about the inflation picture slowly turning before the pandemic, the major reason was that I thought we were moving more towards a helicopter money / MMT world and away from fiscal austerity. The pandemic has accelerated this and a Blue Wave has picked up the baton in its crest.
In risk, while many sectors and areas will benefit more from strong growth than lose out from higher yields, there is no doubt that some areas (eg US equities) are more exposed to secular growth (eg tech) than before and these have massively benefited from ultra low yields. This is a sizeable and influential part of the market.
Having said all this, there is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields. They simply can’t afford to see it happen with debt so high. So far though, Fed officials have been largely relaxed over the recent moves, suggesting that it reflects more positive economic growth. But as it all happened so fast last week they will have had a chance to regroup and align their message for this week.
Although last week’s price action was more about fairly extreme ranges than the overall weekly move given a big rally back on Friday (see later for full recap of the week), the main highlights this week will probably be the Fed speakers in their final week of comments before the blackout period begins ahead of the March 16-17 FOMC meeting. Today see Williams, Bostic, Mester and Kashkari speak but Brainard’s speech on financial stability this morning US time is probably the one to watch for any official Fed comments on last week’s events
Brainard will also make an appearance tomorrow, as will Daly. Evans speaks on Wednesday with Powell himself on Thursday. So plenty of opportunity for the Fed to get a message across to the market. They will likely have been troubled by the recent rise in real yields and possibly by the repricing of Fed Funds contracts. So I would expect some pushback here.
However I’ll end this yield discussion by quoting my colleague Francis Yared (head of rates strategy) who said that the recent move had probably “happened too fast, but did not go too far”. He thinks that the (mildly so far) dysfunctional nature of the repricing should lead to some level of central bank intervention. It would make sense for the Fed to push back against front-end (up to Dec-22) pricing and the ECB to lean against the rise in longer-term real rates. However, from a medium-term perspective, the absolute level of yields is not too high given reflation proxies, the prospects for reopening and US fiscal policy. See his note here from Friday
Asian equity markets have started the week on the front foot with the Nikkei (+2.17%), Hang Seng (+1.17%), Shanghai Comp (+0.72%), Asx (+1.74%) and India’s Nifty (+1.82%) all up. Futures on the S&P 500 are up +0.69% and the European counterparts are pointing to a positive open too. Turning to sovereign yields, 10yr Australian (-25.2bps), New Zealand (-17.1bps) and Japanese (-1.8bps) yields are down this morning. Australia’s large 10y move is coming on the back of the US rally on Friday and the RBA announcement that it would buy AUD 4bn of long dated bonds, double the usual amount, in a regular operation. The RBA meet tomorrow and this will be more closely watched than usual around the world as the Aussie 10 yr rose +48.5bps to 1.91% last week and seemed to help start the global rout. The RBA stepped in to defend their 3-year yield target on Thursday alongside record buying. They also organised an unscheduled purchasing operation on Friday.
Back to the overnight action, yields on 10y USTs are trading flattish overnight and Brent and WTI are up +1.66% and +1.61% respectively but industrial metals are trading softer.
Overnight we have also seen the February manufacturing PMIs in Asia with Japan’s final PMI coming in at 51.4 (vs. 50.6 in flash). Other PMIs in the region also continued to remain in expansionary territory with India’s print at 57.5 (vs. 57.7 last month), Vietnam’s at 51.6 (vs. 51.3 ), Philippines at 52.5 (vs. 52.5) and Indonesia at 50.9 (vs. 52.2). Meanwhile, China’s Caixin PMI printed at 50.9 (vs. 51.4 expected), the lowest since May 2020. Over the weekend, China’s official manufacturing PMI fell to a 9 month low of 50.6 (51.3 in January and 51 expected) largely due to new export orders falling. The week long Lunar NY holiday will have played a part here though. Non-manufacturing fell to 51.4 (52 expected). The composite index dropped to 51.6, the lowest since the lockdowns a year ago.
In other news, former US president Donald Trump said yesterday to a conference of conservative supporters that he’s already laying the groundwork for a third presidential campaign and stopped just short of declaring himself a candidate for 2024.
Turning to the latest on the pandemic there was a tightening of restrictions in some regions in Europe (eg Italy and Norway) and on the other side of the world New Zealand’s largest city Auckland entered a seven-day lockdown on Sunday after a lone case. Turning to vaccines now and the US approved use of J&J vaccine over the weekend, giving the US its third approved Covid-19 vaccine. The company said in a statement that it planned to ship 100mn doses in the first half of the year. Elsewhere, Bloomberg has reported that Germany’s STIKO health authority will soon reconsider its decision not to recommend the AstraZeneca vaccine for people over 65. Can they persuade the public to use it now after a misinformation campaign around Europe that has lead to hundreds of thousands of unused doses?
Looking forward, in terms of other main events this week outside of the Fed, there are a number of highlights. Key data releases include the February PMIs (today and Wednesday) and the monthly jobs report in the US (Friday), with some attention on the UK budget on Wednesday which may be the first major country to start tax rises in some areas as a result of the pandemic. Talking of tax rises, the US decision on Friday not to stand in the way of a global digital tax is a breakthrough on a multi year attempt to harmonise this with the OECD being the driver of the multilateral plan. Although many hurdles may still exist, not least getting it passed through the US Congress, this is certainly a step forward on this plan and could have long-term implications, especially for tech.
Finally, we’re coming to the end of earnings season now, with 480 companies in the S&P 500 having released their earnings at time of writing. Around 79% of them have reported a positive surprise on earnings, and c.70% have reported a positive surprise on sales. Over the week ahead, a further 15 companies in the S&P 500 will be reporting, as well as 64 from the STOXX 600. Among the highlights to watch out for include Zoom today, Target tomorrow, Prudential on Wednesday, Broadcom, Costco, Merck, Aviva and Lufthansa on Thursday, and the London Stock Exchange Group on Friday.
Recapping last week now, the main story for markets was of course the extraordinary selloff in sovereign bonds. That said, much of these losses were pared back on Friday, meaning that the moves over week as a whole look a lot less extreme than they were experienced day-to-day. Indeed, by the end of the week, yields on 10yr Treasuries had “only” risen +6.9bps to 1.405%, thanks to a move of -11.5bps lower on Friday. So the Thursday move (+14.4bps), which was the biggest daily move higher since last March, was followed by the biggest daily move lower for yields since November. The driving force behind higher 10yr yields over the week was real rates (+7.5bps) rather than inflation expectations (-0.6bps), though real yields also saw a massive decline on Friday, falling -13.3bps in their biggest daily move lower since March last year. Over in Europe, the moves in rates were more subdued but still saw large daily ranges, with yields on 10yr bunds up +4.6bps on the week (-2.9bps Friday) to -0.26%, though sovereign bond spreads widened, with the Italian and Spanish spreads over bunds rising +9.2bps and +2.2bps respectively.
As we mentioned on Friday, investors have been moving forward their expectations for Fed rate hikes over the last week, to the point where they’re now pricing in two full hikes by the end of 2023. If realised, that would represent a faster move than the Fed have implied, with their most recent dot plot in December showing most participants keeping rates on hold until at that point. That said, that dot plot was before the results of the Georgia senate election, so before markets were pricing in the chances of significantly higher stimulus, so it’ll be interesting to see if that’s still their view at the March meeting in a couple of weeks’ time. It’s probably far too soon for them to get close to this more hawkish market view. And speaking of stimulus, Friday saw the House of Representatives pass the $1.9tn Biden package by 219-212. However, the version they passed included the proposed minimum wage hike to $15, which the Senate parliamentarian has ruled can’t be included in the bill if the reconciliation procedure is to be used, by which it can be passed by a simple majority. This has seen proposals to restructure it as a fiscal measure, for instance Senator Ron Wyden, who chairs the Senate Finance Committee, has proposed a new tax penalty if workers are paid less than a certain amount. So watch this space for more on this.
Global equity markets also lost significant ground last week as investors questioned whether current valuations could be justified in a higher-yield environment. By the end of the week, the S&P 500 had fallen -2.45% (-0.48% Friday) while Europe’s STOXX 600 was down -2.38% (-1.64% Friday). Tech stocks were the big losers however, with the NASDAQ down -4.92% (+0.56% Friday), while the NYSE FANG+ Index fell -6.27% (+0.12% Friday) in its worst weekly performance since last March. Meanwhile bank stocks outperformed thanks to the prospect of higher interest rates, and the STOXX Banks index gained +1.43% (-2.16% Friday) in its 4th consecutive weekly advance.
Finally, data releases on Friday continued to fuel hopes of a stronger-than-expected recovery. US personal income rose +10.0% in January (vs. +9.5% expected), propelled by the receipt of relief checks. Personal spending also rose +2.4% (vs. +2.5% expected), while the personal saving rate rose to 20.5%, which was its highest level since May last year, supporting the idea that there could be a lot of pent-up demand later in the year as consumers draw down their savings. Meanwhile, the core PCE price index rose +0.3% in January month-on-month (vs. +0.1% expected although the forecasts inputted after the strong recent healthcare component in the PPI were around +0.3%).