This week saw the bond markets and in particular the US bond markets wake up to the possibility of life beyond the pandemic with bond yields increasing by as much as 0.8% buoyed by optimism for an economic recovery post pandemic.
As global infections continue to fall and vaccinations nearing 25% in the UK and 15% Stateside it seems we are heading in the right direction finally. The bond market seems to be viewing that with fiscal stimulus bringing the required cash injection which could ultimately bring a wave of cash that could prompt the seemingly sidelined global central bankers to think about a normalisation of interest rates to stem higher inflation.
Whist it's not uncommon to see a migration to growth bonds from safe haven assets post a downturn. The first concern of this is are they going in too early, as whilst infection numbers are vastly improving, the base levels are still high, with vaccine effectiveness against strain variants still a concern.
The second concern that has been mulled, but not overly reacted to this week is the implication on the stock markets. At the start of the week, like many others this year we saw new highs made in the US markets but that started to tail off into midweek as concerns over higher bond yields matching earnings brought consolidation, but not price panic.
In the currency markets the US Dollar traded heavy bringing the UK’s Pound above and beyond 1.4000 level not seen since 2018. The UK is seen to be coming through the pandemic well and whilst Brexit is not yet entirely behind the country the initial signs of recovery are good, with infections levels down by two thirds and a proactively delivering a solid vaccination programme. As such, it's expected that Prime Minister Boris Johnson will unveil his road map to recovery next week as he signals the start of the nation's release from lockdown.
Whilst the Pound has soared on the news of a return towards normalisation, the PM has been quick to quell expectation by underpinning the fact that this time he will be following medical advice to thwart further lockdowns in the future. With infection numbers still high even at the vastly improved levels he would be wise to do so.
We reiterate our view that a short EUR/GBP position is still our position of choice as it continued to fall this week. The reasons remain constant in that Europe is still struggling to deal with the virus and vaccination programmes.
Whilst newly elevated in price the Pound still remains heavily discounted and with the ECB resolute in the demand for a lower Euro to stimulate exports the Euro seems a logical choice to short.
UK data also continues to outperform the Eurozone, and whilst Bank of England rate setters have continued to jawbone about the possibility of negative rates in the UK, the market isn't buying into that at this time.
Have a great week ahead
The Week Ahead:
Monday - We start the week with German Ifo Business Climate and Bundesbank monthly report. In the US session we get the US Leading Index and late on New Zealand’s Retail Sales.
Tuesday - A busy day starts with Australian Trade Balance data followed by UK Claimant Count and Jobless data as well as Average Earnings. Eurozone CPI is next up and UK CBI. In the US session we have Fed Reserve Head Jay Powell testifying and US CB Consumer Confidence and the Bank of Canada’s Macklem talking.
Wednesday - A quieter day that starts with The Reserve Bank of New Zealand's interest rate decision, statement and press conference. Later in the morning we get German GDP and hear from the Bank of England's Haldane,
Thursday - New Zealand’s ANZ Business Confidence and Australia’s Private Business Corporate Expenditure. In the European Session we get German GFK Consumer Climate and Import Prices. Next up is Eurozone Money Supply and Private Loans. From the US we get GDP, Durable Goods, Prelim GDP and Weekly Unemployment.
Friday - Starts with Australia's Private Sector Credit and Japan’s Housing Starts. Next up is Swiss GDP, French Consumer Spending, CPI and GDP and Spanish CPI before the BoE’s Ramsden speaks. In the US Session we get Core PCE Price Index, Trade Balance, Personal Income and Spending as well as Wholesale Inventories, Chicago PMI and University of Michigan Consumer Spending and Inflation Expectations.