Markets
Energy prices were once again at the center of attention yesterday. Natural gas futures at some point surged 40% in a matter of hours but eased afterwards as Russian president Putin offered to help with the energy crunch. He said gas flows to Europe could reach new records. Gas prices eventually dipped below Tuesday’s closing levels though remain at historically high levels. Brent oil retreated in lockstep to $81.08/b. Stocks in Europe cut their losses in half (EuroStoxx down 1.3%). Wall Street even managed to eke out gains (0.3-0.5%) after Senate Republican leader McConnell offered to raise the US debt ceiling into December, alleviating concerns for a near-term US default (cf. infra). Core bond yields retreated from their early gas-driven boost. The US yield curve flattened with yields up 0.9-1.6 bps at the short end and -0.6-1.7bps lower at the long end of the curve. The US 10y (1.52% at the close) yield briefly touched the highest level since mid-June. German yields were near-flat across the curve. The Japanese yen, Swiss franc and US dollar outperformed on FX markets. EUR/CHF neared the 1.07 barrier. EUR/USD slipped to support at the lower bound of the downward sloping trend channel around 1.153 to eventually close at 1.155 (down from 1.1598). A surprisingly resilient sterling held steady just north of the EUR/GBP 0.85 big figure.
Asian-Pacific equities welcome yesterday’s developments, both in the US and on global energy markets. Stocks bounce up to 3% (SK). China is closed for one last day. It’s an absolute snoozefest on FX markets this morning. US yields rise about 1.5 bps. Bund futures trade lower, brushing aside yesterday’s after-market reports the ECB is mulling a new bond-buying plan for when PEPP ends in March next year (see below). The rumours nevertheless give extra flavour to today. ECB chief economist Lane speaks on multiple occasions and we’re keen to see if any Q&A might reveal more. ECB chair Lagarde along with colleagues from the Fed and ECB are holding a joint Fed/ECB conference in Italy. The B20 takes place ahead of the G20 with Lagarde, Yellen and Draghi among the high-profile attendees. ECB’s September meeting minutes are also worth mentioning. General sentiment may improve today with the sting out of the energy debate, at least for now. Equity futures suggest nice opening gains and core bond yields may edge higher amid risk-on. EUR/USD downside is still vulnerable but the sharp decline over the previous days might ease a bit. We’re keeping a close eye at EUR/GBP 0.85. It risks succumbing to gravity, which would bring the August low of 0.845 at the radar again.
News headlines
Rumours circulated after yesterday’s European close indicating that the ECB is working on a new bond buying scheme to complement the current open-ended Asset Purchase Programma (€20bn/month) once the Pandemic Emergency Purchase Programme runs off in March 2022. Until now, it was generally assumed that the ECB would temporary bump APP in order to avoid a steep drop in monthly asset purchases as PEPP still acquires some €60bn monthly. Unidentified sources close to discussions say the big advantage and difference of a new scheme would be selectivity. Under APP and PEPP, purchases are conducted proportionally in relation to the size of each country’s economy (represented by ECB capital key). Selective purchases can be used to single out countries in times of stress. Question is how such a strategy fits in the central bank’s prohibition to monetary financing… The ECB aims to release its post-PEPP blueprint at the December 16 meeting.
US Senate Majority Leader Schumer sounded hopeful on a quick-fix to the debt ceiling issue. The proposal would extend the debt ceiling into December, avoiding a US default somewhere later this month. Republicans would agree to the temporary extension provided that Democrats affix a dollar amount to the debt level. Final passage through Senate and the House could come later this week. By agreeing to an extension, Republicans want to push Democrats in the position where they bypass the required 60 votes in the split Senate (50-50) using the reconciliation method to get their proposal to suspend the debt ceiling through mid-December 2022 unilaterally approved. Democrats until now argued that time was too short to do so while Republicans don’t want to lend their support as they consider it approving to President Biden’s fiscal spending plans.
