Markets
Energy prices continue to push higher in response to the ongoing military escalation in Iran. The US completed its 11th consecutive night of airstrikes as of this morning, smothering any hopes for a near-term diplomatic solution. Meanwhile, the Iran-allied Houthis in Yemen announced an immediate maritime blockade on Saudi Arabia, targeting the Bab-el-Mandeb Strait connecting the Red Sea to the Gulf of Aden. Saudi Arabia vastly increased its oil exports through that chokepoint, reportedly to 4mln b/d. Brent rallies towards $92+ levels, the highest since mid-June. European gas prices meanwhile have shot up towards the €60/MWh barrier. They’ve closed at levels higher than €60 just once at the height of the Iran war in March. Core bonds were pressured. US yields have added between 6-9 bps across the curve since last Friday with markets assuming Fed action either in September and no later than October. Front-end European swap yields are heavily testing the March highs. ECB hiking odds have surged with money markets now seeing room for at least one additional hike. Frankfurt has all but ruled out July (meeting tomorrow) but September will be a live meeting. Markets are seriously pondering a third move by December (20 bps tightening priced) and have fully priced in one in early 2027. The likes of the European 30-yr meanwhile yesterday touched a new 15-year high intraday. UK gilt yields underperformed vs European peers with yields adding nearly 9 bps compared to Friday’s close. Burnham became the new prime minister on Monday and said he’ll use all “flexibility within them [the existing fiscal rules]”. UK markets were immediately on edge. The honeymoon period for sterling appears over. EUR/GBP rebounded towards 0.853 coming from as low as 0.845 earlier this month. The jury remains out but the pound may face difficulties in strengthening back to these one-year highs. Slightly higher-than-forecast UK core and services inflation printed this morning does little to the currency. The US dollar enjoyed some benefit of the doubt but with risk sentiment not really undermined by the US-Iran latest, gains for the greenback were limited. EUR/USD grinded lower towards the 1.14 area.
Geopolitics and energy prices nevertheless remain a wildcard for trading and further escalation at some point may dent risk sentiment after all. Meanwhile, US tariffs returned to the fore as a potential market-relevant factor. The temporary 10% levy introduced by Trump lapses this Friday. We expect to see some replacements to be announced over the coming days. It is unclear, however, how countries that have struck a deal are affected. Add Q2 earnings from major companies such as GE Vernova (before market), Tesla and Alphabet (both after-market), and we’re in for a potentially volatile session today.
News & Views
The National Bank of Hungary (MNB) yesterday as expected cut its policy rate by 25 bps to 5.75%. Despite rising prices of oil and gas in recent weeks, MNB took notice of favourable domestic developments. Domestic industrial production and retail sales continued to increase in May. Private sector wage dynamics were slower than in previous years, but there was a strong rise in real wages. The unemployment rate remains low. CPI declined to 1.7% y/y in June. Core inflation was unchanged at 2%. Food prices were a factor behind the softer than expected inflation. MNB also expects the rate of price increases to stay below the 3% target for the rest of the year and throughout next year. Households’ inflation expectations have declined since the start of the year. Companies’ expectations for retail price changes decreased compared to the previous month but those for services rose slightly. Better than forecast inflation and lower risk premium on domestic assets preserved the MPC room to maneuver. The MPC sees room for further decreases throughout the summer. The HUF 2-y swap yield yesterday eased 5 bps to 5.37%. EUR/HUF closed the session little changed at 462.3 as the forint reversed a modest gain after the policy decision.
In an interview with the Financial Times yesterday, Czech Central Bank governor Ales Michl pushed back against calls from Czech Prime Minister Andrej Babis for the central bank to cut interest rates and was critical of President Pavel’s drive to adopt the euro. Michl indicated that the recent calls to cut rates were at odds with efforts to tame inflation. CNB last month raised its policy rate by 25 bps to 3.75% over concerns about sticky core inflation (just below 3%). On President Pavel’s push to join the euro, Michl warned that the Czech economy had still to converge sufficiently with other Eurozone countries to make adopting the single currency advisable. According to Michl, a premature move to join the euro could fuel inflation by pushing up wages and other costs.
