Last week Chinese President Xi warned local officials that measures aimed at ending the coronavirus outbreak were slowing the economy – which was already running at its slowest pace in 30 years. He warned against "more restrictive measures" and suggested government officials at "all levels were urged to achieve the targets of economic and social development this year". The People’s Bank of China has already rolled up its sleeves and is ensuring plentiful liquidity.
Over in Frankfurt, after just 100 days as head of the European Central Bank, Christine Lagarde is said to be conducting an in-depth review of the central bank’s policies, targets and morale. The latter was triggered by increasingly shrill criticism of negative interest rates and, where the 2 per cent inflation target hasn’t been met for years. A suggested remedy is to include the cost of housing, which should bump up consumer price index inflation.
The Swedish Riksbank is at risk of making a hash of its interest rate policy – again. In 2010 it raised its target rate from +0.25 per cent to +2 per cent in 2011; after that downhill all the way to a record low at -0.5 per cent in 2013. Taking it back to zero in December 2019, it’s one of the first to decide that negative rates were hurting. Both the Swedish krona and the Norwegian krone are close to their weakest ever levels against the euro, while the Hungarian forint and Romanian leu also lost 5 per cent of their value so far this year, trading at their weakest ever to the single currency.
President Trump has been strong-arming the Federal Reserve, urging chair Jerome Powell to cut the Fed Funds target, which currently stands at 1.5 to 1.75 per cent. Compare this overnight rate to the yield on one-month Treasury Bills, which is 1.54 per cent today, two-year Treasury Notes at 1.41 per cent, and seven-year ones at 1.5 per cent. Clearly the market believes that the Fed is, as they say, lagging behind the curve.
The charts below show benchmark sovereign 10-year Chinese bond yields gapping over the Lunar New Year holiday, to their lowest in just over three years, moving closer to 2016’s record low point at 2.6 per cent. They also traded down to 2.63 per cent in the financial crisis of 2008, so we see no reason why they shouldn’t match that soon.
Benchmark 10-year Bund yields, which had backed up from -0.75 per cent to -0.2 per cent in the four months to December, saw a strong rejection at this point in January, a level that coincided with 2016’s then record low and a Fibonacci 38 per cent retracement resistance. The large bearish Marabuzo is a significant candle, which will probably mark an interim high for yields for several months.
Sweden’s 10-year government paper also saw yields back up from a record low (-0.43 per cent) in August. Stalling at trend line resistance and Fibonacci retracement in January, December and January form a bearish engulfing pair which are not as powerful, perhaps reflecting the ambivalence of their central bank.
The chart of the US benchmark 10-year Note yield tells an even stronger story, in one fell swoop collapsing below triangle consolidation – and has more downside room than the others.
