There is little explanation for the unadulterated anxiety that European markets opened with this morning (see overnight markets below). It was a quiet overnight session coming off a decent close in the US (after Yellen softened her tone on deposit insurance), with solid macro data in Europe before the open that should have acted to lift yields.
SPX futures are down ~1% as European markets sit 2%+ weaker, while oil is down about 4%, iron ore gains 0.7% and copper drops 1.5%. The USD is broadly stronger (EUR down 0.9%, CAD down 0.4%) given the risk-off backdrop with the JPY outperforming (up 0.7%) thanks to the drop in US yields and its haven status (fighting with the 130 level). The MXN continues to track the negative risk mood and the decline in US yields, as it posts a 1% drop on the day which has trimmed its still-decent 0.9% gain over the week; despite the weak risk backdrop and yesterday’s softer than expected H1-Mar inflation data (where core held up, however).
In the Latam day ahead, we’re awaiting Mexican economic activity and H1-Mar Brazilian inflation at 8ET; Chile also publishes PPI data at that time. For Mexico’s IGAE, the median consensus of 3% y/y from a 2.62% expansion in December is somewhat below the most recent update of the INEGI’s nowcast (IOAE) that pointed to a 3.3% y/y reading for January—and anticipating an acceleration to 3.5% in February on preliminary data. The January increase is expected to be driven by the services sector, which is seen gaining 0.7% against a flat unchanged activity in the secondary sector. Overall, Mexican data to start the year have been solid and would support continued tightening from Banxico. Now, global financial situations may be in the driver’s seat and remain the main thing to monitor in the next few weeks. This aside, Banxico is due to hike 25bps next week while leaving the door open to more increases.
Brazil’s H1-Mar IPCA is expected to come in at 5.33%, falling from 5.63% in its previous reading while also decelerating in its sequential reading (0.67% from 0.76%). It’s rear-view mirror data at this point, so soon after the BCB’s hawkish hold on Wednesday. The BRL nevertheless followed the bank’s decision with a clear underperformance among the major FX, falling 1.1% yesterday, with challenges to the central bank’s autonomy—or at least strong pressure to cut rates—from Lula weighing on currency sentiment. Even lower house Speaker Lira had to step in, saying “we need an armistice so the finance minister, the central bank president, the executive branch and congress may debate the new fiscal framework once Lula returns” (from his trip to China). We don’t see emotions cooling any time soon, but a softer CPI print today would likely be welcome by all; though government officials will come out louder to call for a cut.
Overnight markets
The UK market open saw a slide in bond yields across the board, in bull steepening fashion as US2s fall 22bps on the day against a 13bps drop in 10s. Anxiety over Deutsche Bank’s subordinated debt is one possible explanation as the bank’s CDS jumped yesterday and triggered (what seems to us as unfounded) chatter of another possible bank failure. But there is no clear evidence that DB (down 10%+ today) is going the way of CS and the move here seems self-fulfilling.
Prohibitive liquidity in rates markets may be accentuating anxiety-driven trades with UST volatility, which while coming down from the CS panic days last week, still remains a great degree above where it sat pre-COVID-19—and is in fact at comparable levels to the March 2020 market swings. Continue to monitor banking sector developments as these are, by and large, the biggest driver of market action while there is little sense that measures announced by governments or reinforcing vocal support are preventing further declines.
—Juan Manuel Herrera
DISCLAIMER
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.