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DJ Rising Treasury Yields Pose Risk to Investment Portfolios -- Market Talk

· 02/05/2021 06:42

1142 GMT - Higher U.S. sovereign debt yields could lead investors to cut risk on fear of a premature tightening of financial conditions, Mark Dowding, chief investment officer at BlueBay Asset Management, says. "We...are wary that a move in U.S. yields beyond 1.25% in the coming week or two could lead investors to turn more defensive," he says. Running a portfolio which is long in risk assets and short in rates has some intrinsic appeal at the moment, though investors need to be cautious that an "exogenous risk-off event could see equity and bond yields recorrelate," he says. (lorena.ruibal@wsj.com)

1133 GMT - The reduced chance of U.K. negative interest rates should allow sterling to extend recent gains, particularly against the dollar, MUFG Bank says. In the Bank of England's policy statement Thursday, it told lenders to prepare for negative rates but said that shouldn't be taken as a sign it would cut rates below zero. "The meeting was more hawkish than expected and certainly reinforces our view of potential GBP outperformance," MUFG analyst Derek Halpenny says. There is greater scope for GBP/USD to rise than for EUR/GBP to fall as EUR/USD is unlikely to weaken much further, he says. GBP/USD rises 0.1% to 1.3685. EUR/GBP drops 0.1% to 0.8750 after earlier reaching its lowest level since mid-May at 0.8738, according to FactSet. (renae.dyer@wsj.com)

1124 GMT - The resilience of Germany's industrial sector softened somewhat at the end of the fourth quarter, Katharina Koenz at Oxford Economics says. Factory orders dropped 1.9% on month in December, driven mainly by weakness in orders from eurozone countries, as lockdowns restricted activity in most members of the bloc aside from the Christmas break, Koenz says. The only bright spot was orders from non-euro area countries which rose 0.5%, proving that external demand remains resilient, she says. Koenz says the drop in December is in line with Oxford Economics's view that the industrial sector will lend much less support to the German economy in the first quarter, and that gross domestic product will contract moderately. (maria.martinez@wsj.com)

1104 GMT - The yield on the U.K. 10-year benchmark sovereign bond hits a 10-month high Friday, as investors price in a vaccine-fueled economic recovery following higher inflation forecasts by the Bank of England. Policymakers' projection Thursday of inflation rising slightly above the 2% target in 2022 and 2023 triggered a selloff in gilts, driving yields higher. The move was accelerated by the central bank's resistance to the prospect of negative rates. The 10-year gilt yield trades last at 0.484%, its highest level since March 2020. (lorena.ruibal@wsj.com)

1100 GMT - The disappointing December reading of German manufacturing orders can be treated as a sign of normalization rather than a fundamental turnaround in industrial recovery, HSBC economist Christian Fuertjes says. German industrial orders plummeted by 1.9% on the month in December, as weak eurozone demand put an end to a streak of seven consecutive monthly gains. "Given the impressive pace at which German industrial orders recovered from their unprecedented collapse in March and April due to the COVID-19 pandemic, a set-back almost seemed inevitable," the economist says. January data will show how German manufacturing copes with the challenges of potentially shaky demand due to lockdowns and a still fragile supply chain situation, he says, expecting a significant slowdown. (maria.martinez@wsj.com)

1059 GMT - The safe-haven dollar's recent resilience to positive market sentiment will be tested at 1330 GMT Friday when January's U.S. non-farm payrolls report is expected to show a return to jobs growth, HSBC says. "Today looks set to be an important signal for whether FX is truly getting over its risk on, risk off fixation and moving back to the more traditional world of interest rates and yield differentials as the key anchor for currency movements," HSBC's Dominic Bunning says. The dollar's recent appreciation, despite stock market gains, reflect higher U.S. Treasury yields on economic recovery hopes, he says. HSBC expects non-farm payrolls to rise 125,000 in January after falling 140,000 in December. The dollar index drops 0.1% to 91.4330. (renae.dyer@wsj.com)

1045 GMT - Anglo American stands out from its mining peers owing its exposure to platinum group metals and diamonds, which is attractive in the near term and offers more compelling growth, Berenberg says. The bank says it sees Anglo American as a defensive pick versus Rio Tinto and BHP, but that it prefers Rio Tinto over BHP in the near term on dividend upside. Berenberg initiates Anglo American with a buy recommendation and target price of 2,000 pence, while Rio Tinto and BHP are both placed at hold, with target prices of 6,000 pence and 2,000 pence, respectively. (sabela.ojea@wsj.com; @sabelaojeaguix)

1036 GMT - Corporate debt denominated in pounds is increasingly being driven by U.K. sovereign debt yields, Bank of America says. "Gilt yields jumped higher yesterday on the relative hawkishness of the [Bank of England rate] decision, a timely reminder for investors that rates are driving credit yields a lot more now," says the bank's European credit team. Currency-hedged investors can still find "best-in-class" yields at the front-end of the sterling credit market. For euro investors looking at sterling opportunities, the segment between 10-year and 15-year part of the curve, in the A-rated category, offers a attractive post-hedging yield pick-up of about 60bp, they say. In the BBB segment, investors will find the best sterling opportunities in 5-7 year maturities, analysts say. (lorena.ruibal@wsj.com)

1032 GMT - The Norwegian krone rises against the euro as oil prices jump on global economic recovery hopes and supply curbs by major producers. EUR/NOK falls 0.3% to a two-week low of 10.2911, according to FactSet. The rollout of vaccines has improved the global economic outlook while OPEC and its allies decided to maintain their supply-tightening policy Wednesday. "The Norwegian Krone typically trades as a function of oil prices and that suggests it should outperform as oil prices steadily rally as they fully price the re-opening of the global economy," Nordea Asset Management analyst Sebastien Galy says. Higher crude prices should also support other oil-related currencies, he says. USD/RUB falls 0.6% to 75.0622 and USD/CAD drops 0.3% to 1.2792. (renae.dyer@wsj.com)

1005 GMT - Markets interpreted the Bank of England's policy update Thursday more hawkishly than policymakers had probably anticipated, says Rabobank's Stefan Koopman. Leading to this interpretation were the announced six-month delay to any possible below-zero interest rate cut and a higher inflation forecast. Based on the operational hurdles and weak signalling "it would seem imprudent to have any pricing in of Bank Rate cuts until this 6-month period reaches its conclusion," Koopman says. A more optimistic economic outlook led rate-setters to project the consumer price index at slightly above the 2% target in 2022 and 2023, which formed "the crux of why the Monetary Policy Meeting was interpreted hawkishly," triggering a correction lower in gilts and lifting sterling, he says. (lorena.ruibal@wsj.com)

1001 GMT - The euro could fall to a range of $1.10 to $1.15 in coming months, from $1.1982 currentl,y as the U.S. economy's recovery is expected to outpace the eurozone's, Nordea Asset Management says. The U.S. could relax coronavirus restrictions sooner than the eurozone due to a faster vaccine rollout, which combined with the prospect of large-scale fiscal stimulus, should support the U.S. economy, Nordea analyst Sebastien Galy says. "This should drive the U.S. Treasury curve to steepen and bring forward a tad expectations of rate hikes," he says. A steepening yield curve is when the gap between short-term and long-term government bond yields widen and typically indicates investors expect stronger economic growth and rising inflation. (renae.dyer@wsj.com)

1000 GMT - Vinci's 2020 results showed an exceptionally strong free cash flow that supported a dividend in line with the previous year, UBS says. The French construction and infrastructure company's FCF generation was nearly flat year-on-year at EUR4 billion, compared with UBS's expectations of EUR2.1 billion. This was partly driven by a working-capital inflow of EUR2.3 billion, which led to net debt at EUR18 billion at year-end--around EUR2 billion below UBS's estimates. "As a result of this strong cash generation, Vinci is keeping the dividend flat at EUR2.04 vs consensus of EUR1.30," the bank says. Shares trade 5.6% higher at EUR85.82. (giulia.petroni@wsj.com)

(END) Dow Jones Newswires

February 05, 2021 06:42 ET (11:42 GMT)

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