Softer Risk Sentiment and Firmer Dollar

March 23, 2021
  • Measures of implied volatility in equities and FX markets have begun to subside but remain elevated for U.S. Treasuries
  • Germany announced stricter lockdown measures and Chile a new spending package worth 2% of GDP
  • UK employment starts year weak but will hold up better in the near-term due to the extended furlough scheme
  • Joint sanctions against China’s human rights abuse are more important as a precedent than in its direct impact
  • The RBNZ introduced measures to tackle rising house prices

The same underlying risks continue to dominate market sentiment: concerns about rising yields, the threat of a third wave of the virus globally, the spat over the AstraZeneca vaccine, and US/Chinese tensions. These all added up to a softer session for equities across the APAC region with Nikkei -0.6% and Hang Seng -1.4%. European equity indices and US futures are down around 0.5%. In FX, the dollar is broadly stronger, especially against the kiwi and aussie, bringing the DXY index back above the 92 level. The upward pressure on global bonds has subsided somewhat, with U.S. 10-years at 1.64% and other sovereign debt yields following lower.


Markets still seem on edge after the rise in global yields and prospects of stricter lockdowns in Europe, but measures of implied volatility have begun to subside. The Vix is back to its lows at sub-20, though not back to its pre-pandemic level. Implied volatility in U.S. Treasury markets (measured by the MOVE index) has stabilized a higher level of near 70; this compares to around 45 at the start of the year. Also, G7 FX aggregate implied volatility has been stable at relatively low levels, but still about 2 ppts higher than pre-pandemic times.

The Chilean government will prop up its pandemic spending by $6 bln, approximately 2% of GDP. This brings the total emergency spending to $18 bln. As in Europe, the country faces another wave of the pandemic forcing further lockdown measures, impacting 75% of the nation. Infection numbers are at their highest, and the medical system is starting to face severe shortages of intensive-care beds.


German Chancellor Angela Merkel announced a new set of mobility restrictions, though the move had already been widely telegraphed. Most stores will be shut over the Easter holidays (April 1-6), along with limitations on gatherings and public meetings. All this to avoid accelerating what is now knows as the “third wave” across Europe.

ECB’s net PEPP weekly purchases were the highest since December at €21.1 bn. This compares to an average of €26.6 bln for the first three months of the program and €13.1 since the start of the year. President Lagarde meant it when she said the ECB would buy bonds “at a significantly higher pace.” Lagarde added via a blog post that “we retain the option to adjust the pace of purchases at any point” in response to changes in market conditions. We think the bar is high for any material change in ECB policy in the foreseeable future since the risk of higher yields in the back end of the European curve is far smaller than that of other major countries, especially after this new faster pace of purchases.

UK employment figures for the start of the year were weak but are likely to hold up better in the near-term due to the extended furlough scheme. The scheme helped nearly 5 mln people in January. The unemployment rate ticked lower in January to 5.0% on a 3-month basis, mainly due to higher inactivity by workers, but this will surely start moving higher once the support measures are removed.

National Bank of Hungary announces its decision later today and is expected to keep the base rate steady at 0.60%. CPI rose 3.1% y/y in February, the highest since September but still and near the center of the 2-4% target range. Despite the weak forint, the central bank has not moved the one-week deposit rate since its 15 bp cut back last July. The currency has been recovering in recent sessions but remains close to the weak end of the range against the euro. This is part of the reason markets are starting to price in the chance of a hike later this year.


Joint sanctions against China’s human rights abuse are more important as a precedent than in its direct impact. The sanctions by U.S., Canada, UK, and EU relate to the treatment of China’s Uyghurs in the Xingjiang region and are directed to specific individuals. These are largely symbolic, but they could reflect a different diplomatic landscape with the Biden administration. Beijing retaliated by imposing sanctions on 10 EU individuals and four entities.

The RBNZ introduced measures to tackle rising house prices, which probably means less need to speed up tightening. The measures include removing tax incentives for investors, boosting help for first home buyers, and more housing supply. This follows changes to the RBNZ’s mandate to include a greater focus on house prices. This news sent NZD down through 0.71 to a 0.7050 currently. The new measures also dim expectations for a rate hike later this year, given the greater focus on macro-prudential type measures.

Singapore’s February CPI came in at the firmer end of expectations. Headline inflation accelerated to 0.7% y/y from 0.2% in January, the highest since January 2020. Core CPI also came in a bit higher than expected at 0.2% y/y. While the MAS does not have an explicit inflation target, relatively low-price pressures should allow it to maintain its current accommodative policy at the next meeting in April. That said, the pace of price increase is starting to pick up and could quickly prompt a policy change. Note that this was the first month of positive core inflation in 12 months.

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