Stock markets were nothing but ecstatic yesterday. Lacking guidance on the economic calendar, investors simply held an anecdotal evidence of the limited impact of omicron on public health and therefore on the economy. Both European and US stocks were up 1.5-3% + higher. Core bonds have lost ground with US Treasuries severely undermining the German Bund. The yield curve in the US bear was flattened with changes at the short end from 4.9 bps (5y) to 5.9 bps (2y). A $ 54bn 3y auction yesterday showed mixed results with a higher bid to cover (benefiting from a recent sharp yield increase) but an increased primary trader premium at the expense of an indirect premium. The 3y tenor closed 5.8 bps higher. The long end of the curve (10 to 30y) added 1.9 bps to 4bps. The German bear flattened as well but changes were limited to 2.5 bps (2y) to 1.3 bps (10y). The resulting US / EMU yield differentiator kept EUR / USD under pressure. The pair slipped to an intraday low of 1.1228 but managed to finish at 1.1267 in the end. It is striking to see the euro struggle so much in such an optimistic trading session. The common currency is not preparing for a major change in the ECB next week. Sterling also remained on the defensive, which was unusual as well. Central banking uncertainty may be the common factor here. Unlike the United States, where Fed chair Powell downplayed the impact of omicron, and the ECB and BoE expressed more caution. This may have implications for monetary policy. EUR / GBP briefly dipped below 0.85 but eventually closed unchanged at 0.8508. An increase in commodity prices has raised similarities of NOK, CAD, AUD and NZD.
The optimistic mood in Europe and on the WS is once again pouring into Asia-Pacific business this morning. An almost vicious cycle has developed in recent days. Shares add up to 1% on a slow news day. New Zealand (+ 2%) outperforms. Core bonds are trading a little higher. U.S. yields are down 1 bp across the curve. The US dollar is heading south as the euro tries to build on yesterday’s intraday turnaround. EUR / USD is trading at around 1,129. China’s yuan is reaching its strongest level since 2018 (USD / CNY 6.35) as enhanced growth prospects outweigh PBOC’s (theoretically CNY-negative) easing monetary policy.
There is once again a vast gap in today’s economic calendar. However, the $ 36 billion 10-year auction is worth mentioning tonight. Unlike the short to mid end of the curve, long bond yields have not increased as much, on the contrary. We want to see if and how it affects demand. The Bank of Canada holds its final policy meeting of the year. It has a stellar report on last Friday’s payrolls to consider as it assesses the potential economic impact of the omicron strain. For European and American markets, sentiment remains key. We may see a slowdown in equity and the core bond yield strengthens yesterday. As the euro has been behaving more JPY-like lately, we expect the EUR / USD decline to ease as well. First resistance is located near 1.135 (downward trend line connecting June-October lows), followed by 1.1422 (August 2020 high correction).
The U.S. House has passed a bill (222-212) that establishes a procedure to increase the debt limit by a simple majority in the 50-50 Senate instead of the 60 votes needed now. A higher debt limit allows the government to issue new debt to pay for existing commitments. Under the agreement reached by Senate Majority Leader Schumer and Minority Leader McConnell, Democrats will raise the debt limit by a dollar amount, instead of just suspending it for a certain amount of time. Democrats are still debating the exact size with a vote scheduled in the Senate on Thursday.
The Reserve Bank of India (RBI) kept its policy rate unchanged at 4% in a 5-1 vote. The monetary policy committee still prefers to err on the side of caution due to the slack in the economy. Private consumption remains below its pre-pandemic level with the omicron variant threatening to delay a sustained and comprehensive recovery. The RBI expects the Indian economy to grow by 9.5% in the year ending March with an inflation forecast of 5.3% for the full year. The RBI uses a 4% inflation target with 2% tolerance. USD / INR stands at around 75.65 this year.