News: Take Five: Testing times.
1 / LITMUS TEST
On February 25, when a tantrum raged in the bond markets, the Treasury Department auctioned $ 62 billion worth of 7-year bonds – but investors seemed to have forgotten to show up. The lowest bid-cover ratio ever recorded, at 2.04, pushed 10-year government bond yields to a year-high of over 1.61%.
The Fed is signaling that it will not be disturbed by rising yields, which is again worrying the markets. The planned 10- and 30-year government bond sales on Wednesday and Thursday are described by TD Securities as a “litmus test for potential market disruption”.
The first aims to raise $ 38 billion and the second aims to raise $ 24 billion. Another $ 58 billion worth of three-year notes will be auctioned Tuesday.
Clearly, the Fed believes that inflation spikes are temporary and that tight financial conditions do not warrant any action so far. The outcome of the auctions could test his resolve.
Chart: US yields and dollars –
2 / DO NOT PRESS IT
From Frankfurt to Rome and Madrid, government borrowing costs have increased 33 basis points this year. The European Central Bank meeting on Thursday will therefore be a test of its ability to suppress bond yields.
As higher yields can ruin a fragile eurozone economy, markets want action, or at least a commitment, to step up bond purchases through the $ 1.85 trillion pandemic emergency pandemic purchase program. Otherwise there is a risk that the sale will be accelerated.
Almost a year ago, markets, already alerted by COVID-19, were shocked by ECB President Christine Lagarde’s remark that the bank was not there to “close spreads”. Rising yields forced the ECB to react with the PEPP.
The anniversary is a reminder of the ECB: It never hurts to show markets now and then so as not to take them too far.
Chart: 10-year government bond yields this year –
3 / CHINA’S GREAT RETREAT
Premier Li Keqiang opened the annual weeklong National People’s Congress (NPC) with his 2021 report, restoring China’s annual economic growth target, which was set at over 6% that year.
The bigger question, however, is how Beijing is pulling back pandemic stimuli and avoiding asset bubbles without disrupting the economy and nervous financial markets.
Chinese stocks and government bonds fell this week after top banking regulators warned of overseas bubbles and rising lending rates.
The outstanding trade and monetary supply data will show how uneven the economy still is and what the foam level is in the banking system. The markets will watch the NPC closely for clues.
Graphic: China TSF, GDP and Markets Image –
4 / ARK AGROUND?
After the decline in tech stocks, Cathie Wood’s $ 23 billion ARK innovation fund is a fund that has fallen more than the market for the past few days. Wood became known for oversized bets on companies like Tesla and Square, which soared during the pandemic. It has seen $ 14.84 billion in inflows over the past 12 months, according to Lipper data.
TechCorporations are very sensitive to higher bond yields, however, making the ARK fund – and others who like it – vulnerable to performance slumps and outflows. Wood’s heavy exposure to illiquid stocks could prove to be a problem.
Graphic: ARK Innovation’s holdings dropped on Nasdaq –
5 / DARK HORSE EUROPE
Equity returns in Europe and the US will be head to head in 2021, but after five years of underperformance, European stocks may have just enough tailwind to win the 2021 race.
The tech-poor old continent is not at the forefront of the bond sell-off that hit the rate-sensitive Nasdaq. Indeed, Europe is a must for investors looking to trade reflation as it is full of commodities, financials and other value stocks.
The yields on 10-year US government bonds of around 1.5% correspond to the dividend yield of the S&P 500. Europe’s risk-free equivalent, the German Bund, now pays -0.3%, nowhere near the dividend yield of 1.8% on EURO STOXX.
Analysts predict that European earnings growth will outperform the US on a quarterly basis in the quarter of 2021. So 43.8% versus 21.6% in the first quarter and 79.1% versus 50.9% in the second quarter.
Graphic: US vs. EU result –
Reporting by Sujata Rao, Dhara Ranasinghe and Julien Ponthus in London; David Randall in New York and Andrew Galbraith in Shanghai; compiled by Sujata Rao and Karin Strohecker
Original Source © Reuters