Around the World – ECB, Euro, Sovereigns, China

On the heels of ECB member Nowotny’s comments yesterday that they will most likely be raising rates before QE ends (but we still have no idea when), the 2 yr German bund yield is higher by 2.5 bps to a still insane -.765%. That is a 6 week high. Sovereign yields are also higher throughout the region on the long end too. The French 10 yr yield is 2 bps from a 6 month high and the Italian 10 yr yield is matching the highest level since October 2014. Stay short these bonds. The euro is holding at a 6 week high vs the dollar. Stay long this currency vs the dollar.

One of the key supports for the euro (in the context of its sharp fall over the past few years after what the ECB has done) has been its trade surplus (more money coming in vs going out). It narrowed though in January to 15.7b euros from 23.1b in December as exports fell m/o/m while imports were up. The trade surplus with the US is due in large part to Germany (as we know) as Trump and Merkel meet today. The noteworthy deficit that the eurozone has is with China but that’s the case with many countries. The number had no impact on any markets as its somewhat dated.

The Mexican peso is rallying to the best level since the day after the US election. Who would have thunk? Ahead of the G20 pow wow, Steve Mnuchin said “It is not our desire to get into trade wars, it is our desire to deal with where there is imbalance in certain trade relations.” This comes a few days after Peter Navarro said he wanted the US, Canada and Mexico to create a trade powerhouse ahead of his desire to renegotiate NAFTA. Maybe our worst trade fears won’t be realized.

A day after the PBOC raised interest rates by 10 bps on Thursday for 7 day, 14 day and 28 day reverse repos and for its Standing Lending Facilities (SLF) on the heels of the Fed move, the Shanghai comp fell 1% overnight after a 4 day run. The Shanghai property index was lower also by 1%. Chinese officials continue to dance the fine line of wanting to tame the debt/housing bubble but trying to keep growth around the made up 6.5% level. Again, a tightening of monetary policy globally will be a major story this year.

Taking the first two months together to smooth out the influence of the lunar holiday in China saw foreign direct investment down by 2.2% y/o/y. An almost 14% increase for the 1^st two months from the EU was more than offset elsewhere. What’s most noteworthy on China investment flows is the sharp decline in outward investment as authorities have cracked down on nonsensical investments such as a Chinese LED lighting company taking a stake in a European soccer team.