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12.03.2021 04:12 PM
EUR/USD extending weakness
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Since early morning on Friday, bond yields have been logging a steady climb. Importantly, yields of dollar-denominated, euro-denominated, and pound-denominated bonds are on the rise. Curiously, yields of US Treasuries with short maturity are also increasing. The question is why the euro is losing ground despite the overall trend of rising yields. Why did the pan-European STOXX 600 fell 0.5%, having snapped a 4-day winning streak despite a pledge by Christine Lagarde yesterday to expand the money supply?

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Indeed, the reason behind the euro's weakness could be rising bond yields.

Bert Colijn, a senior economist at ING, notes that the ECB made efforts to push bond yields down. However, the fact that the massive stimulus bill in the US had been signed into law entailed the overall spike in bond yields. The expert reckons that the US history is the underlying reason as the US remains the top global economy whereas the ECB is the main counter force.

This market response indicates that expanding bond purchases will not be able to tame soaring bond yields. So, experts are anticipating some evidence of Lagarde's words. Analysts at Commerzbank think that the EU economy could be trapped in dire straits without a new portion of cash injections. The effect from bonds with short maturity will not offset consequences from long-term bonds.

The European stock market is trading in the red. This is mirrored in volatile stocks of hi-tech companies. The hi-tech stocks in Europe sank 1.7% today.

Prosus, the Dutch hi-tech titan where a third of the stock belongs China's Tencent Holdings, tumbled 4.9% as China penalized some of companies for violation of the anticompetitive law.

BMW dropped 2.2% following a report on annual corporate earnings which fell despite growth in sales.

Only companies, which reported positive profits for the year, have their stocks growing. Oddly, but such stocks rise disproportionally on account of outflow of investments from less successful companies.

For example, Burberry's stock jumped 8.4%. Brunello Cucinelli's stock surged 10.8%.

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The overall picture is that investors in the eurozone are traditionally more cautious. They tend not to trust quicksilver changes in market sentiment. This affects the euro because American investors are too exulted in light of Joe Biden's relief package.

Besides, experts fear that the mass vaccination in the EU is unfolding at a slow pace.

Market sentiment in the EU was dampened due to the news on the revocation of AstraZeneca vaccine. Germany is rattled because of the scandal of the Greensill bankruptcy. Previously, the company had attracted huge state investments.

At present, the euro moderated its decline, though it may resume its weakness in the New York trade.

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Egor Danilov,
Analytical expert of InstaForex
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