Looking for that ‘ECB put’

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FILE PHOTO: The European Central Bank (ECB) logo in Frankfurt

A look at the day ahead in markets from Sujata Rao.

“Gradual”, “data-dependent” – those were the words ECB President Christine Lagarde used to soften the hawkishness of her message last week. But after three days of violent repricing on euro debt markets, there is likely more to come.

Borrowing costs for Europe’s southern flank have risen sharply, with investors now demanding a yield premium of 160 basis points to hold 10-year Italian bonds relative to safer German equivalents. That’s 30 bps more than before last Thursday’s ECB meeting.

European corporate debt may be due a correction too; Citi reckons top-quality credit spreads could widen to 90 bps from 70 bps at the end of 2021.

The recent moves are raising the risk of fragmentation along national lines of debt markets and the derailment of southern European economic recovery, especially given the post-COVID rise in spending deficits. The question now is: How far can the selloff go before policymakers offer reassurance – in other words, the ECB ‘put’, along the lines of the backstop the U.S. Fed is typically seen to provide equity markets?

The answer? It might still have some time to run. Yields, while rising, are low in absolute terms and Europe still has the safety net of the EU recovery fund. Lagarde promised “the ECB is “obviously going to respond” if sovereign spreads widen a lot. But as yields resume their climb on Tuesday, JPMorgan analysts note “the market may be willing to test this commitment”.

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Elsewhere, Softbank’s deal to sell chip designer Arm in a $60 billion deal has collapsed Facing regulatory roadblocks, SoftBank drops sale of Arm to Nvidia, will seek IPO amid regulatory hurdles. That comes days after a $5 billion purchase by Taiwan’s GlobalWafers of Germany’s Siltronic was scuppered by Berlin.

(Graphic: Italy, https://fingfx.thomsonreuters.com/gfx/mkt/akveznnwqpr/Pasted%20image%201644271537354.png)

Key developments that should provide more direction to markets on Tuesday:

-British consumers slowed the pace of their spending last month

-France’s BNP beats Q4 profit estimates, BP records highest profit in eight years in 2021

-New York Fed issues Q4 Household Debt and Credit Report

-U.S. trade balance

-U.S. 3-yr notes auction

-US earnings: Coty, DuPont, Harley Davidson, Thomson Reuters, Pfizer, S&P Global, Omnicom, Chipotle, Lyft, Peloton

-European earnings: Qiagen, Banco BPM, Evolution Gaming, BP, Ocado, BNP Paribas, TUI

-Emerging market central banks: Poland, Moldova  

(Reporting by Sujata Rao; editing by Karin Strohecker)