- Risk markets had another good day; positive sentiment continued overnight.
- Price action in bond markets more muted - investors await the FOMC minutes and Italian election.
- Focus today will be on the minutes from the January FOMC meeting.
The debate over looming spending cuts in the US is heating up. The automatic spending cuts (the sequester) – originally part of the 2011 debt ceiling deal – is scheduled to take effect on March 1 if nothing is done. Both Republicans and Democrats have laid out their bargaining positions. The parties agree that the across-the-board approach to cutting spending is not an optimal solution, and would like to replace the cuts with a more targeted, gradual deficit-reduction plan. But they differ fundamentally on the question whether tax increases should be part of the alternative. Congress is in recess this week, and so far there is no indication that the parties will be able to find a compromise before March 1 (see WSJ).
Risk markets had another good day yesterday, and equities posted decent gains. The S&P 500 ended the day up 0.7% to reach another five-year high. The positive sentiment gained pace despite a disappointing dip in the US NAHB home builder index from 47 to 46. In Asian trading, the risk-on mode has continued with most equity indices higher. The Nikkei is up 0.8% at the time of writing supported by the Japanese trade balance, which showed a significant increase in exports. Even with this improvement, the trade deficit widened to a record JPY1.6trn as imports surged 7.3%.
US treasuries posted modest long-end led losses yesterday but price action was more muted than in equity markets, as investors await this evening’s FOMC minutes. The curve steepened marginally with two-year yields up 1bp and 10-year yields up 2bp.
In FX markets, the general risk-on sentiment has sent the EUR/USD pair higher overnight. The NZD weakened after New Zealand central bank governor Wheeler said in a speech that RBNZ “is prepared to intervene to influence the Kiwi” if the currency gets too strong. However, this message was moderated significantly in the following part of the speech, as Wheeler stated that “given the strength of recent capital flows, we can only attempt to smooth the peaks of the NZD/USD exchange rate”. The JPY has continued to move lower, as markets await the announcement of the new central bank governor next week.
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