Markets
Correction on a correction? A reality check on an overly optimistic short-squeeze yesterday? Or markets just re-entering low-visibility no-man’s land? Whatever the labeling of the today’s market price action, investors clearly don’t see a good enough reason to build on yesterday’s euphoria triggered by the ceasefire in the war between the US (& Isreal) against Iran. Reportedly, the ceasefire is holding up fairly well except for the Israel’s campaign against Hezbollah which at the same time remains one of many high profile points of discussion between the US and Iran as they prepare for talks in Islamabad this weekend. (Free) passage of shipping through the Strait of Hormuz also faces a huge ‘interpretation gap’ between the parties involved as Iran holds to its point that any passage will be subject to ‘necessary arrangements with the Iranian authorities to securely pass’. This suggests that any normalization of supply from the Persian Gulf probably won’t occur anytime soon. Oil, still one of the better barometers to measure supply obstructions, rebounded from levels just north of $90 p/b yesterday (Brent) to $98 currently. The easing in the TTF Dutch gas reference for now proves to be a bit more resilient (€46 MWh). The Eurostoxx 50, after an outsized 5% gain yesterday, returns 0.7%. US indices open modestly lower (S&P 500 -0.15 %). On yield markets, ECB officials don’t give much of a specific assessment on most recent developments yet. German yields after yesterday’s sharp easing are rebounding between 7 bps (2-y) and +5 bps (30-y). A sideways intraday pattern after a higher open maybe also illustrates some market agnosticism on what to expect both on the geopolitical process as well as on stagflationary risks going forward. US yields in a daily perspective change less than 1 bp across the curve. Data these days, especially if they refer to the pre-war era mostly have little market impact. February US PCE deflators (headline 0.4% M/M and 2.8% Y/Y, core 0.4% M/M and 3% Y/Y) anyway came in as expected, but are holding well above the 2% level going into Iran crisis. Personal income (-0.1%) disappointed. US weekly jobless claims rose a higher than expected 219k , but longer term averages still suggest no major deterioration. As indicated, these data don’t capture much of the post-Iran economic dynamics. In this respect, tomorrow’s US March CPI release is one of the first hard data with potential market relevance.
Despite lingering global uncertainty, the dollar again shows a rather hesitant pattern. DXY eases from 99.05 to 98.90. EUR/USD is holding yesterday’s gain quite easily (EUR/USD 1.169). The yen underperforms with USD/JPY rising from 158.6 to 159.05. Sterling also slightly underperforms the single currency with EUR/GBP returning north of the 0.87 mark.
News & Views
The European Commissioner for Economy Dombrovskis told Members of the European Parliament that nothing prevents EU countries seeking to introduce a windfall tax on energy companies similar to what was done in the wake of the Russian invasion. The raised amount could be used to cushion the blow from the price spike. Dombrovskis said they are looking into a coordinated approach on a European level. He added that other measures are being prepared too, including making sure that electricity is taxed less than fossil fuels. The Commissioner ruled out more radical options such as Italy’s called-for activation of the general escape clause that would temporarily lift the 3% budget deficit rules. “A condition for activating the general escape clause is to have a severe economic downturn in the euro area or European Union. We are currently not in this scenario.”
The Polish central bank kept the policy rate at an unchanged 3.75%. The unusually short policy statement barely touched on domestic developments. Inflation rose to 3% in March, mainly due to a strong surge in fuel prices resulting from the Middle East conflict. The outlook for prices, which next to fiscal policy, fuel price regulations, wage and economic growth is currently strongly influenced by external geopolitical developments, will shape the central bank’s future decisions. The Polish zloty unsurprisingly shrugged at the expected outcome with EUR/PLN hovering around 4.25. Polish swap yields add between 3 and 4.5 bps, joining the broader trend in core euro areas.
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