The steps

Yesterday, major European stock indices bounced off the necks of double top formations (eg EuroStoxx 3935), indicating that any downward correction remains short lived at least for now. A return to the peaks of recovery is necessary to confirm this pattern. The move was in part a catch-up move with the United States finishing well away from the intraday lows on Tuesday after a final sprint higher. US equity markets seemed to confirm the better risk attitude from the start of the week, being on course to end the day a little higher. However, US President Biden’s senior business adviser Tai decided otherwise. She said the US administration would work with the WTO to allow a temporary suspension of intellectual property rights for Covid-19 vaccines. A late sell-off in pharmaceuticals weighed on sentiment, with US stocks closing between + 0.3% (Dow) and -0.4% (Nasdaq). Better risk sentiment for most of yesterday’s session didn’t really impact FX and FI trading. No sub-consensus either, but still very solid US ecological data (ADP employment; non-manufacturing ISM). The trade-weighted dollar treats water just below the first resistance around 91.36. EUR / USD is hovering just above the big figure of 1.20. US rates fell 0.8bp (2yr) to 2.8bp (7yr) from a daily perspective, with the belly of the curve outperforming the wings. The German yield curve steepened with yields rising 0.3bp (2yr) to 1.6bp (30yr). Changes in the 10-year spread over Germany barely changed, with Greece outperforming (-4bp) and Italy underperforming (+3bp). The outperformance of US Treasuries could be partly related to the Treasury maintaining stable redemption volumes over the next quarter and partly to the Fed Governors’ request to support the official line of the US central bank after l Dallas Fed Kaplan dissenting opinion (start debate on reduction) and Treasury Secretary Yellen’s tongue slippage (interest rates may have to rise). Boston Fed Rosengren thinks it is premature to talk about tapering because there is still a lot of slack in the US labor market while the temporary rise in inflation will not persist until 2022. He clarified that once reducing as much support as the Treasury market. Thus, the reduction in purchases of MBS (currently 40 billion dollars / month against 80 billion dollars / month of US Treasuries) could go faster. In particular, Fed Vice-President Clarida stressed that the Fed’s bond purchases provided significant economic support and saw no risk of overheating. Cleveland Fed Mester said it does not believe the rise in inflation is the type of lasting increase needed to meet the forecast for policy rates. Chicago Fed Evans is also in no rush to talk about the cut. Fed Governor Bowman hinted at an upward revision to growth forecasts in June, but not so much the inflation outlook, calling the risk of inflation above the 2% target low.

The sense of risk remains essential for trading today, but it will be a great day for the British Pound as well. An optimistic monetary policy report and therefore a hawkish BoE is at stake with a resonant SNP victory in the Scottish parliamentary elections, which is seen as a proxy for an EU membership referendum. The former will favor the medium to long term, providing the UK currency with interest rate support earlier, while the latter may trigger some short-term volatility.

News headlines

The Brazilian central bank (BCB) raised its Selic rate by 75bp to 3.5%, turning the recent communication into action. He also said a similar move is likely at the June meeting. This “partial normalization” would bring the key rate back to its pre-pandemic level, but still below its neutral level of 6 to 7%. The BCB struck a more hawkish tone, referring to the optimism of growth, gradually reducing uncertainty and core inflation still expected “at the top of the range compatible with compliance with the [3.5-3.75%, +/- 1.5ppt] inflation target ”. He expects inflation to be close to the target in 2022.

The Chinese state economic planner said the country would “indefinitely” suspend all activity under a China-Australia strategic economic dialogue, citing a “cold war mentality” and ideological discrimination. Under the deal, China and Australia have only held three rounds of talks since 2014 and have not met since September 2017, making the suspension largely symbolic of the growing frustration between the two.