Let's just call it the weekend

Britain’s economy contracted less than expected in January, but nevertheless showed the dire impact of lockdown on economic activity. The European Central Bank said it would speed up the pace of bond buying to lean against the rise in yields but didn’t provide an awful of clarity overall. Wall Street rose to a fresh record and Bitcoin made a new all-time high as investors looked to the imminent arrival of stimulus cheques. European stocks move a little lower in early trade on Friday despite a new record high on Wall Street for the S&P 500. However, the main bourses are on track for a roughly 4% gain this week, while the FTSE 100 is up a little over 1%.

A 30-year bond auction in the US went off without too much trouble in the end. Nevertheless, US 10-year yields have popped back to 1.6% a level that has elicited some concern of late. Meanwhile, Britain’s chancellor, Rishi Sunak, warned that “the public finances are much more sensitive to changes in interest rates and inflation than they were previously”. Quite. The more you are in hock the more ‘sensitive’ you are to rates. But equally, if you have a central bank that will hoover up at auction, you don’t need to worry about the market rate…but that is a debate for another day. It seems the UK government is intent on making sure the public finances get ‘fixed’, whatever that means. (it means higher taxes for you and me, is what it means, so we can afford to pay people not to work).

“Financing conditions are defined by a holistic and multifaceted set of indicators, spanning the entire transmission chain of monetary policy from risk-free interest rates and sovereign yields to corporate bond yields and bank credit conditions.” Holistic and multifaceted…woooweee!! That sounds so clever. The ECB, well, did what the ECB does. Little clarity and a lot of complexity – flexibility – around its reaction function. Christine Lagarde spent a long time trying to explain what the ECB is trying do by saying it will increase the pace of bond purchases; partly because it’s a bit unclear about what it wants to achieve and partly because Lagarde is not a master of the press conference like Draghi. The ECB will speed up asset purchases, but it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. Which sounds like it has no clue: flexibility is good, but it must be a little more in control of things than this.

The sensitivity to rates is extraordinary. Cue the headline: “European bonds rally after ECB pledges to step up asset purchases”. Get this – the yield on 10-year bunds slipped 0.02 percentage points – a whole two basis points! That is quite a reaction, I mean talk about bond vigilantes…I joke of course…

Gold failed at the $1,740 area and has retraced the last few days’ gains as yields climbed again.