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Europe called lower, Turkish lira tumbles

Broadly speaking, equity markets fell at the back end of last week as a rise in bond yields chipped away at sentiment. 

On Thursday, the US 10-year yield hit 1.75%, its highest level in 14 months, US tech stocks bore the brunt of the declines. European indices began Friday’s session in the red but the mood went from bad to worse when it was announced the Federal Reserve would not be extending the supplementary leverage ratio (SLR) – a scheme that requires US banks to hold fewer reserves. The announcement weighed on sentiment as it is a sign the Fed is starting to row back ever so slightly on their extremely accommodative policy.

Earlier in the week, the Fed maintained their dovish stance as they kept rates and the asset purchase programme on hold, in line with forecasts. The GDP guidance for 2021 was lifted from 4.2% to 6.5% but the inflation forecast was upped too, from 1.8% to 2.4%. A rise in inflation typically goes hand in hand with higher growth but judging by the dot plot predictions, the US central bank won’t be hiking rates until at least 2024. Going into the meeting there were some rumblings that there was increasing division among policymakers with respect to when there will be lift-off on the rates front but those fears have faded for now.

The announcement on Friday that the SLR will expire at the end of the month sent out a message the Fed feels the banking system is robust enough it can withstand some of the support being removed. As the US economy continues to expand, banks should have the confidence to keep lending, and in turn, keep the recovery going.

Yesterday it was announced the EU is set to block exports of the AstraZeneca-Oxford vaccination to the UK. Relations between the two sides haven’t been great recently. The trading bloc has underperformed with respect to rolling out vaccinations, more than 10% of the region’s population have been vaccinated, while the UK reading is roughly 43%. It is reported that Brussels is contemplating the harsh measure as a way of fast-tracking their own vaccination scheme but Britain might retaliate and halt exports to continental Europe. Brussels is citing a vaccine supply crisis as a reason behind the possible export ban, but it reeks of political antics. A tit-for-tat export ban will harm both sides and in turn, will probably put pressure on stock markets as the re-opening of economies will be delayed.

Markets in Asia are mixed. The tumble in the Turkish lira has driven up the yen as fears that Japanese retail investors would drop the high-yielding currency and hold the yen as a risk off play – this put pressure on the Nikkei 225. Fears that Turkey will impose capital controls have hammered the lira, this comes following the abrupt replacement of the countries chief central banker. Turkey’s currency has recouped some of the losses it endured following the start of trading on Sunday night. Meanwhile, stocks in mainland China are higher, while the Hang Seng is flat. European indices are set for a muted open.                  

As a result of the last week’s SLR news, the US dollar was pushed higher. Even though the central bank is a long way off from tightening its policy, the move to end the lax capital requirements is a step in the right direction.

Jerome Powell, the chairman of the Federal Reserve, and Jens Weidmann, the head of Germany’s central bank, are due to speak at an event hosted by the Bank for International Settlement at 1pm (UK time). Mr Powell is unlikely to deviate too much from last week’s update. Mr Weidmann might reference the rise in the German 10-year yield, which hit an 11 month high last month but is still in negative territory.

Gold posted a second consecutive weekly gain. In early March, the metal dropped to a nine month low, it has subsequently rebounded. Lately, some market participants have been referring to Bitcoin as digital gold. The cryptocurrency set a new all-time high over one week ago so that has detracted from gold’s appeal. Rising bond yields is also an issue for gold as it does not pay interest, so even though the commodity has enjoyed a positive run recently it might be short lived as it faces competition from other assets.

Oil suffered greatly last week as concerns about rising stockpiles in the US as well as worries about European demand hit the market hard. The EIA report showed that US oil inventories increased for the fourth week in a row but keep in the big freeze played a major role in that, refining activity is getting back to normal.

For a while, a number of European countries paused the distribution of the AstraZeneca-Oxford vaccine due to health concerns. At the end of last week it was confirmed that Germany and France confirmed they will resume the rollout of the vaccination. Lately, there has been increasing chatter about a new wave of Covid-19 cases brewing in Europe. These issues all played a major role in oil’s sharp fall last week but WTI and Brent crude are still comfortably above their respective 50-day moving averages, so the broader bullish trends are intact.

The US existing home sales report for February at 2pm (UK time) is tipped to be 6.49 million, down from 6.69 million in January.   

EUR/USD – while it holds below the 50-day moving average at 1.2060, the recent bearish move should continue, support might be found at 1.1800. A break above 1.2242 should bring 1.2349 into play.

GBP/USD – since late September it has been in an uptrend, it hit a 34 month high last month. If the positive move continues, it should retest 1.4241. A pullback might find support at 1.3826, the 50-day moving average. 

EUR/GBP – has been in a downtrend since mid-December, last month it dropped to an 11 month low, and further losses might target 0.8400. A rally above 0.8730 should put the 0.8800 area on the radar.

USD/JPY – has been in an uptrend since early January, this week it hit a nine month high. If the positive move continues it could target 109.85. A pullback from here could find support at the 108.00 area or 105.52, the 200-day moving average.    

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