Market movers today
Focus remains on the war in Ukraine and whether US and Europe will impose an oil and gas embargo on Russia. The EU Commission will lay out its strategy on how to reduce its dependence on Russian energy.
In Poland the central bank will announce rates. We and other market analysts are looking for a rate increase of 50bp, but the sharp drop in the Polish Zloty and the spike in gas prices add to already strong inflation dynamics and hence put the central bank under immense pressure to carry out a bigger rate hike.
On the data front we get German industrial production and US NFIB small business optimism index.
Norway releases the monthly GDP data.
The 60 second overview
EU to reduce its dependence on Russian gas: According to Bloomberg the EU will today present its new plan to reduce the bloc’s dependence on Russian gas imports by up to 80% this year. The plan will include tapping of new gas supplies, increasing energy efficiency, higher LNG imports and new pipelines from suppliers outside Russia. Especially, the plan will recommend to boost LNG imports significantly. The plan should also include a framework for liquidity support for companies effected by the crisis and a suggestion that member states could tax extraordinary windfall profits of energy companies.
Extreme volatility in gas: Despite the market being aware of the EU plans to cut dependence on Russian gas the Dutch natural gas future jumped up to 64% yesterday in a day of extreme volatility. However, like oil the market calmed somewhat during the day up ‘only’ 4% though prices are still up 100% in March.
Russia may cut of gas supplies: However, the market have to brace itself for another volatile day as Russia late Monday said that it considers to cut natural gas supplies to Europe through the Nordstream 1 pipeline. The threat comes the day before the EU presents its plan on how to be less dependent on Russian energy. See Bloomberg story here.
Volatile energy markets: Oil prices open yesterday at an elevated level with Brent front-month contract trading as high as USD 140 a barrel. The move higher came after US Secretary of State Antony Blinken over the weekend said that the US and its allies are actively discussing an embargo on Russian oil. However, oil prices eased somewhat during the day as Germany said that they are against a ban on Russian oil due to its possible negative impact on the German economy calling Russian oil ‘essential’. Hence, Brent oil ended the US closing at USD 125 a barrel. Oil prices have been stable overnight.
Inflation expectations: German 10Y break-evens were yesterday pushed higher by 17bp to a new record-high at 2.57%. The 2Y break-even rose a stunning 52bp to a record-high 4.77%. The significant jump in market inflation expectations drove nominal yields higher though most of the move came through real rates trading deeper into negative.
Other commodities also seeing wild price swings. Other commodities such as nickel and wheat prices also saw extreme volatility and significantly higher prices yesterday as the market is basically pricing a full boycott of all Russian exports and as exports from Ukraine remain insecure due to the war.
New sanctions: EU’s Von der Leyen said yesterday that the EU continues to work on further sanctions on Russia, and Italy’s Draghi says EU countries need to move quickly. For more see this Reuters story. Apparently European governments are ready for a new round of sanctions targeting ports, ships, more individuals as well as technologies used in military equipment. An announcement may come as early as today.
Equities: Equity markets were in a rollercoaster session on Monday, followed by an equally volatile session in the commodity space. European markets saw huge intraday-moves, with Stoxx 600 starting the session -4% lower only to recover to -1.1% at closing. Meanwhile, US markets slid deeper into red as the session dragged on, with S&P500 ending at -3%, Nasdaq -3.6%, Dow -2.4%, and Russell 2000 -2.5%. Another huge outperformance of defensives, with growth cyclicals selling off -4% while energy and utilities gained 1.5%. VIX rose to its highest level this year at 36.5. US futures point lower this morning as well, but much more mildly so in the ballpark of -0.5%.
FI: It was again a very volatile day in the European government bond markets where “geography” and “size” matters more than fundamentals as shown by the dramatic widening of spreads for countries “close” to Ukraine/Russia such as Poland and Hungary as well Austria and Finland. However, we are also seeing smaller EU countries such as Slovakia, Ireland and Portugal underperforming not only Germany but also France. More pressure will be added to Russian bonds as JP Morgan will exclude all Russian bonds from their bond indices.
FX: USD and JPY gained and NOK and SEK lost on a day which was characterised by large moves on commodity and equity markets. EUR/USD dropped firmly below 1.09 and EUR/SEK rose firmly above 10.80.
Credit: Rising energy prices and the war in Ukraine led to further spread widening yesterday. iTraxx Xover widened 21bp and Main close to 5bp. HY bonds widened 23bp and IG 10bp.
Nordic macro
Norway: We expect the Norwegian mainland GDP to grow by 0.2% m/m in January, boosted by the partial reopening of parts of the service sector but held back by high power prices undermining retail sales. However, as we already know that capacity utilization is higher than normal and that wage and price expectations have risen sharply, there is currently less focus on the strength of economic growth.
