Europe edges lower, Biden and US bonds in focus

After a weak handover from Wall Street and Asia, European bourses are heading south, giving back some of yesterday’s gains.

A combination of surging US treasury yields overnight and risk-off trade-on concerns over further fallout from the Archegos margin default are dragging on stocks. While Tuesday’s session in Europe was notably strong with several European bourses hitting key milestone levels or fresh all-time highs, the optimism was unlikely to last given the old continent’s deteriorating Covid picture.

Not even upbeat data has been able to pull European indices out of the red. UK GDP for the fourth quarter was upwardly revised to 1.3% quarter-on-quarter – an improvement on the 1% earlier reading. Even so, this still puts the UK economic contraction for 2020 at -9.8%, the largest contraction in three centuries.

While expectations were that UK stocks would outperform this quarter given its underperformance versus peers, that hasn’t rung true so far. The FTSE needs to see a move above 6800, out of its current holding pattern, in order for the bulls to gain momentum.

Looking ahead to the US open, futures are pointing to a mixed start. The tech-heavy Nasdaq is attempting to keep above the flatline, while the broader US market is heading for mild losses.

While US treasury yields have eased back from overnight highs, this is most likely a bout of profit-taking rather than any fundamental change to the bond market rout.

Today’s key event will be the unveiling of Biden’s infrastructure plan – another bold move by the US President that could amount to USD4 trillion. This comes hot on the heels of the recently approved USD1.9 trillion stimulus plan, further bolstering expectations for a strong US economic recovery.

Yields will be very much in focus following the unveiling and are likely to dictate the markets’ direction.

USD could have further to run

While US dollar bulls are pausing for breath today as bond yields ease off highs, the technical picture suggests that March’s run-up could still have further to go. The US dollar index crossed above the key 200-day moving average and is on track to close the month 3% higher.

US 10-year treasury yields have slipped from an overnight high of 1.78 to 1.73 at the time of writing, pulling the greenback lower. However, huge fiscal stimulus and an aggressive vaccine rollout are expected to result in a strong economic rebound.

Biden’s USD1.9 trillion stimulus package has unquestionably helped boost consumer confidence, which jumped from 90.4 to 109.7 – the highest level since the start of the pandemic. Job market optimism is also elevated, giving few reasons to be cautious about US economic recovery and the US dollar right now.

Looking forward, President Biden and the ADP payrolls ahead of tomorrow’s NFP could well bring further positive momentum to the greenback.

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