A perfect storm for risk markets (Daily analysis 4.03.2021)

From the risk markets standpoint, there is one thing worse than the fears the US economy might overheat, leading to the Treasuries sell-off. A perfect storm constitutes a worsening of the growth outlook combined with a rise in yields.

That is exactly what happened on Wednesday as the yield on the US 10 -year government bonds edged higher towards 1.50 pct despite disappointing macroeconomic releases. February ADP employment report showed a significantly lower rise in the jobs number and ISM services index eased back to 55.3 pts, which points out that service sector woes persist regardless of fast-surging manufacturing activity. The bond market was unfazed by dreadful data, which still suggest a bumpy road before the growth picks up due to the rise in market measures of inflation expectations. The latter was predominantly caused by President Biden, who supported the idea to cut the income threshold for stimulus payments. This paves the way for an immediate passing of the fiscal package worth USD 1.9 bln in the US Senate.

As a consequence, the US dollar trades firmer and both equities and commodities feel the pressure. Copper prices are heavily influenced as the red metal dives almost 5 pct. Both European indexes and US equity futures trade in the red. The EUR/USD pair holds above the 1.20 handle but had evidently lost some steam. The USD/JPY exchange rate trades above 107.30 and might be poised for a further upside. Today's key event is Fed chair Jerome Powell's speech. A verbal intervention might be on the cards as other FOMC members have already voiced their concerns the yields have been on the rise, too soon and too fast. Noteworthy, this is the last chance to calm the bond market as the Federal Reserve enters a communication blackout period before the FOMC meeting scheduled on March 17.