This is the message coming from the market last week, with a 3.5% fall in the US dollar accompanying a 3.1% fall by the US market. But there is also the risk that the hyperactive US President’s words will be demonetised by the continued toing and froing over tariffs on Mexico and Canada. Meanwhile, investors are looking with fresh eyes at Europe, which should benefit from the new rearmament drive.
The intention is there (+40bp for the 10-year Bund and one of the worst VaR shocks experienced by the German curve) but, alas, the devil is in the detail, as Paris and Berlin are already arguing over whether the €150bn proposed by the European Commission should be opened to non-EU partners. Paris is quite logically opposed, since more than 70% of the EU's defence purchases are already made outside the EU.
This week, ECB members will be out selling the Governing Council’s latest monetary policy decision. In the US, after the mixed employment data, the BLS will publish the February CPI, which will probably have no impact on the outcome of the next FOMC meeting scheduled on 19 March.
Rates: German yields appeared to have found an equilibrium level during Friday's session, closing virtually unchanged ahead of the vote on the new investment plan proposed by the coalition partners. The yield for the 10Y Bund is now trading at 2.85%, at its highest since October 2023, while the yield for the 2Y Schatz is at 2.25%, up 25bp over the week. Investors are beginning to hesitate as to whether there will be two further ECB rate cuts in 2025, putting the probability of a fourth cut this year at 70%. As for € swaps, the curve underwent a bear steepening, with the 2Y-10Y segment closing at 37bp, up 4bp over the session. This movement also resulted in a widening of swap spreads, with the 10Y Bund ASW now trading at -12bp (+5bp over the session). Sovereign spreads remained stable, with the 10Y OAT-Bund and BTP-Bund spreads trading at 72bp and 112bp, respectively. In the United States, February's employment data did not have a major impact on the markets, with the yield for the 2Y TNote closing up 4bp at 4%.
FX: the DXY dollar index declined by 0.31% to 103.7 following the publication of the US employment data, which missed expectations. The euro managed to sustain its recent rise against the US dollar, setting a new 4-month high at 1.0888. The euro is heading for its best week since 2009, up 4.5% WTD. The Swedish krona was the currency that rebounded the most against the US dollar (+1.12%) and was the only one to outperform the euro (+0.34%, the EUR/SEK pulling back to 10.93). The only G10 currencies to weaken against the greenback were the Australian, New Zealand and Canadian dollars, which shed 0.36%, 0.37% and 0.51%, respectively (taking the AUD/USD to 0.631, the NZD/USD to 0.572 and the USD/CAD to 1.437). The Australian and New Zealand dollars fell against the greenback due to their risk-off sensitivity, while the loonie was rattled by the weaker-than- expected Canadian Labour Force Survey. Turning to emerging currencies, the biggest gains against the US dollar were in the EMEA, with the Hungarian forint, for example, bouncing back by 0.8% (USD/HUF at 367.0), while it shed 0.18% against the euro (EUR/HUF at 398.4).
Equities: bearish session on Friday for equities, with European indices opening in the red and remaining trendless intraday. The DAX underperformed, retracing some of its gains for the week. Similarly, in the case of the Stoxx 600, industrials, consumer cyclicals, techs and materials underperformed, whereas telecoms, real estate and utilities rebounded. The VStoxx was up by 1 point. In the United States, the Nasdaq sank further into the red (extending its drawdown to 10% since mid-February). In the case of the S&P 500, consumer cyclicals and financials underperformed.
Credit: slight widening of iTraxx indices on Friday (+0.6bp for the Main, +4bp for the X-Over) while the cash market remained rather constructive. S&P downgrading Nissan's credit rating to BB (from BB+), and keeping it on Negative outlook, did not weigh on the carmaker's spreads, which tightened by 2bp-3bp over the session. In the case of the iTraxx Main, the biggest mover was Bayer, its 5Y CDS tightening by more than 5bp following the announcement of an up to €875m capital increase (i.e. 35% of the current share capital) in case its needs to quickly reach settlements with plaintiffs in the United States (Roundup case). The German pharmaceutical group's hybrid debt outperformed the market, tightening by 15bp-20bp against swaps.
