Bond bears took the FOMC’s message to heart and were big sellers on the day, driving yields sharply higher. Though the long end generally led the weakness, the entire curve was under pressure. Treasury yields dropped -1.7 bp overnight to now 1.69%, but JGB rates lifted 1.4 bp to 0.111%, after a mixed bag of BoJ decisions that included a widening of the band around the yield targets and a scrapping of the ETF buying schedule within an unchanged buying ceiling.
The FOMC’s optimistic view on the economy and the pledge to keep policy supportive for now rekindled reflation trades yesterday and the BoE also did little to push back against the trend higher in yields. ECB’s Lagarde meanwhile did her best to support peripheral markets with dovish comments in the PM, but it will also be the ECB’s stepped up purchase schedule that is helping to keep Eurozone spreads in as the recovery is still looking shaky.
Headlines:
- The BoJ’s purchases focus is set to shift away from the JPN225 to the wider Topix, which saw Topix rising 0.2%, while the JPN225 dropped 1.4%.
- Hang Seng and CSI 300 declined -2.0% and -2.7% respectively, as the start of top level talks between China and the US was anything but harmonious.
- There are fears that Australia would suffer the fallout from fresh US-China tensions; the ASX corrected -0.6%.
- GER30 and UK100 futures are down -0.8% and -1.0% respectively this morning, after a broad sell off across Asia.
- German PPI inflation jumped to 1.9% y/y from 0.9% y/y in the previous month. The headline rate was actually fractionally lower than expected.
- US: Blow-out Philly Fed report (the index jumped to the highest since 1973), and a disappointing jobless claims release.
- The high-level diplomatic meeting continues in Alaska between China and the US; China has outlined its hopes for an easing of tensions as a result of the meeting but also expressed low expectations.
Forex Market
JPY – dropped back to 108.70, amid a largely stronger Yen.
EUR – pulled back to 1.1901.
GBP – lifted to 1.3955 on dollar strength. The Pound continues to register as the strongest of the main currencies on the year so far, reflecting both a paring in the Brexit discount and UK’s world leading vaccination program (with nearly 40% of the population having now received at least one dose of a vaccine, only Israel and the UAE are ahead).
AUD – under pressure, at 0.7850 highs.
CAD – dropped to 1.2461.
USOil – at $59.30 as oil prices are heading for the biggest weekly drop since September.
Gold – 3-day range, within the 1717-1755 area.
Today: There is little on the calendar in Europe and the US, which will leave markets to digest the impact of this week’s round of central bank decisions, while watching the difficult US-China meeting that didn’t get off to a harmonious start.
Biggest movers this week are USOIL and Palladium, with USOIL at $58.20 as oil prices are heading for the biggest weekly drop since September and Palladium at $2,755 on disruptions in supply along with expectations of more demand from the automobile sector.
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Andria Pichidi
Market Analyst
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