ECB Reduced Pandemic Bond Buying
While bond yields remained on the agenda in global markets, warnings from the European Central Bank and the decline in the pandemic asset purchase program rate were also noteworthy. According to the latest data, the lowest intake in four weeks was achieved in the pandemic recruitment program.
The European Central Bank (ECB) slowed down its bond purchases last week as part of the pandemic emergency purchasing program.
The ECB bought 16.9 billion euros ($20.3 billion) under this program last week. Thus, the lowest asset purchase in the last 4 weeks was achieved under this program. That’s despite multiple top officials warning that the euro area might not be able to cope with higher borrowing costs.
To be noted, the decline in the rate of buying bonds came after the official warnings about the yields.
The directives of the European Central Bank (ECB) officials regarding the bonds continue. After ECB member Francois Villeroy de Galhau, another member Fabio Panetta made evaluations about the bond yields.
ECB Executive Board member Fabio Panetta said Tuesday that the jump in government-bond yields seen in recent weeks “is unwelcome and must be resisted.”
Panetta said, “The steepening we see in the nominal GDP weighted yield curve is undesirable and it must be resisted.” Stating that the increase in US bond yields started to show unwanted contagion, Panetta predicted that financial conditions would tighten if not intervened.
“It is not too late,” he argued during an online event. “We are assessing market conditions, we can intervene and recalibrate the pace of our purchases, and in the last 12 months we have been quite effective. And I think we can still be effective in steering market conditions and yields.”
Panetta also said that the ECB “should not hesitate” to increase the pace of its bond purchases if necessary.
ECB member Francois Villeroy de Galhau also signaled the clearest intervention ever, saying the bank could and should take action against the unwanted rise in bond yields. Villeroy stated that they should use the pandemic emergency bond purchase program to lower the yields and said, “We are ready to use all our instruments when appropriate, including lowering the deposit interest.”
Higher yields are a concern for the euro area because banks use sovereign debt returns as a benchmark for lending. The region’s recovery is still expected to be slower than that of many other advanced economies, owing in part to the region’s slow vaccine roll-out, and higher borrowing costs could suppress momentum even further.
European bonds edged lower Tuesday led by Italy, which saw 10-year yields rise 4 basis points to 0.70%. Those on their German peers were 1 basis point higher at minus 0.33%.
Brexit Hits Germany’s Exports
The German statistics office said exports from Germany to the UK fell by almost a third in January, pointing to Brexit and the coronavirus pandemic as key drivers of the biggest slump since the 2009 financial crisis.
The German Federal Statistical Office (Destatis) announced the leading data for January regarding Germany’s exports to the UK after Brexit. Accordingly, Germany’s exports to the UK in January decreased by approximately 30 percent compared to the same month of the previous year, after the Brexit trade agreement went into effect.
Destatis made an assessment regarding the data in question, “Exports to the UK after 2020, marked by the Covid-19 epidemic, continued to decline in January 2021 due to the effects of Brexit.”
Destatis stated that Germany’s exports to the UK have decreased since 2016, when the Brexit referendum was held, and it was reminded that in 2015, the year before the referendum, Germany’s exports to this country were recorded as 89 billion euros.
Last year, Germany’s exports to the UK fell by 15.5 percent to 66.9 billion euros due to the Covid-19 outbreak.
On the other hand, Germany’s imports from the UK decreased by 9.6 percent in 2020 compared to the previous year and declined to 34.7 billion euros.
The Office attributed the January slump to “the effects of Brexit after the year 2020, which was marked by the Corona pandemic.”
The impact of Covıd-19 meant that the UK economy was smaller in January than a year earlier. The International Monetary Fund estimates that the UK and euro zone economies will not return to their pre-pandemic levels until next year.
Britain left the European Union last year. After months of negotiations between the European Union (EU) and the UK, the post-Brexit trade agreement was signed on December 29, 2020.
Concerns were raised by the German business community that the agreement, which entered into force in January 2021, would result in additional customs bureaucracy and logistical problems.
The Association of German Chambers of Commerce and Industry (DIHK) stated that German companies will have to file millions of customs declarations in the future years, and calculates that this will cost companies 400 million euros annually.
About half of UK exporters are experiencing difficulties owing to confusion over paperwork, higher costs, and delays to shipments, according to a survey of 465 firms by the British Chambers of Commerce
Economic Outlook Improves in China
ZEW announced that the outlook for the Chinese economy has improved.
The European Economic Research Center (ZEW) declared that the economic outlook of the country is positive, as the country’s macro-economic development shows that it will increase for the next year and the expectations of the economy will grow at a new record level.
On the other hand, the increase in the macro economic indicators of the China Economic Panel (CEP) to 64 points with a monthly increase of 9.1 points was also effective in ZEW’s statement.
While the ZEW survey shows that China’s economic situation has improved by 13.6 points to 55.8 points, the survey participants stated that they expect the country’s economy to grow by 6.5 percent in 2021 and 5.5 percent in 2022.
In addition Private Caixin services PMI, which gauges China’s services sector activity, came in at 51.5 in February, matching the market expectation, down from 52 in January. Although the index declines for a third consecutive month and stands slightly above the expansion-contraction line, the market expectation for the PMI in the following months is high.
The Caixin Manufacturing PMI for February was 50.9, down 0.6 percent from the previous month. The Caixin composite PMI rose to 51.7, the smallest rise since May 2020, due to declines in both manufacturing and services PMI. The fall in private Caixin PMI data correlates to National Bureau of Statistics statistics.
In an interview with the Global Times on Wednesday, Tian Yun, vice director of the Beijing Economic Activity Association, said that the surge in domestic Covid-19 community cluster cases in January has an impact on the service industries, adding that the index reading is actually better than industry insiders’ expectations based on real-economy research.
Tian predicts that, as the weather warms, service PMI will steadily increase as a result of the positive effects of China’s Covid-19 management efforts and the expansion of vaccine inoculation. The rise in service activity costs, including materials and jobs, he attributed to the recovery of Chinese activities.
ZRE international financial markets researcher Michael Schroeder said expectations and assessments of the current situation indicate improvement.