Markets
Geopolitics completely overshadowed strong and promising European PMI business confidence (from 52.3 to 55.8 on a rebound in services). The Kremlin dashed early optimism on a potential Biden-Putin summit, calling it premature and unconfirmed. Tensions near the Ukrainian border instead intensified. Russian assets were dumped: the ruble lost more than 3% vs the euro and the dollar, the Moscow exchange index tanked a whopping 10% (intraday even 16%) and CDS spreads jumped several tens of bps. Oil prices rose about 2% (Brent closed at $95.39/b) as supply worries mount. Risk-off held sway on European markets as well with equities losing more than 2%.
The Swiss franc outperformed. Safe haven bids pummeled EUR/CHF back below 1.04. The Japanese yen came in second (USD/JPY 114.74, EUR/JPY 129.79). EUR/USD drifted lower to the low 1.13 area. The euro also lost out against sterling with EUR/GBP easing from 0.834 to 0.831.
German yields erased a part of their opening gains. The curve bear flattened with yields 1.4 bps (10y) to 2.4 bps (2y) higher. The US bond (and equity) market faces a rude awakening after a long weekend (closed yesterday for President’s Day).
Russian president Putin held a long speech yesterday evening that eventually lead him signing decrees recognizing two self-proclaimed separatist republics in the Donetsk and Luhansk regions in eastern Ukraine. With the order, Putin also send “peacekeeping forces” to the regions. It’s a dramatic escalation in the stand-off with the US and its allies warning Russia may take it a step further. Countries including the US, Canada and the UK have already announced sanctions.
US bond yields decline up to 6.2 bps (10y) this morning. This morning’s price action in the Bund future is interesting though. It traded for most of the Asian session a tad below yesterday’s close. Further rising oil prices (2-3%) and the impact it could have on inflation is providing counterweight. In a similar peculiar move, safe haven currencies fail to profit from the heightened uncertainty. The economic calendar (Conference Board consumer confidence in the US and the Ifo indicator in Germany) remains subordinated to geopolitical developments. Another classic risk-off session in theory provides a fertile breeding ground for core bonds. We keep the lackluster (Bund) performance in Asian dealings at the back of our minds though. First meaningful support in the German 10y yield stands at around 0.15%. We are looking at the 1.80% area in the US 10y.
The dollar should profit but its recent performance isn’t that convincing either. EUR/USD is currently trying to keep the 1.13 alive. A break lower brings 1.123 and next 1.1186 back on the radar. EUR/GBP is trading in the 0.832 area.
News Headlines
A Bloomberg article refers to a report by the advisory board to Germany’s finance ministry which argues in favour moderately extending debt maturities in order to increase planning security in the budget and reduce risks. In the report they stress that Germany’s tendency to issue mainly short-term bonds has been a cheap strategy, but comes with risks attached in rising interest rate environment. Longer maturities on the other hand help to stabilize tax and spending policies and decouple them from mortgage savings. Additionally, they also increase crisis resilience if, for example, there were financial problems in the euro area. ECB governing council member Villeroy repeated his call to end net asset purchases around the third quarter of this year in an interview with French newspaper Liberation. Afterwards, the timing of events depends much on how inflation evolves. There’s no point deciding now on the future date of interest rate increases, he argues. Time is essential to avoid errors: action must be neither taken too late, at risk of letting inflation get out of control, not too early, at risk of putting the brakes on the recovery.
