Markets
Same story, different day. Only this time, US risky assets underperformed compared to European peers. Wall Street opened lower and slid further throughout the session. Stocks finished 2.37% (DJI) to 3.62% (Nasdaq) lower. The S&P500 (-2.95%) closed around the 4198.70 support level (23.6% retracement of the complete recovery cycle). Equities in Europe had a dramatic start with the EuroStoxx50 quickly trading almost 5% in the red. Losses eventually were capped at 1.23%. Together with other indices including the German Dax, it still officially closed in bear market territory (>20% losses from cycle high).
Many commodities soared once again, sparked by reports of a possible Russian oil embargo by the US (and maybe its allies). Additional concerns arose late in the US session with Russia threatening to cut gas flows to Europe. The most notable price evolutions were (Dutch) gas futures which at some point rose 80% before paring gains to a still-impressive 18% in just one day. Oil extended gains as well. Brent finished at $123.21/b – the highest since 2012. Nickel skyrocketed an astonishing record 66% on a supply risk-driven short squeeze.
The moves jolted inflation expectations in the US and Europe. 10y inflation swaps in the former flirted with a record high to finish at 3.08% (+15bps). Europe closed at a 14-year high of 2.72% (+15bps). With real yields still in decline, nominal yield changes amounted to +3 bps (30y) to +7.2 bps (2y) in the US. The German curve saw a similar bear flattening, edging 1.9 bps (30y) to 5.7 bps (5y) higher. 10y yield support in the US and Germany at respectively 1.704% and -0.074% was tested but survived.
The dollar on FX markets held sway. Trade-weighted, the greenback surpassed the 99 barrier. EUR/USD came another step closer to the pandemic low in the 1.06-1.08 area (close at 1.0854). The CHF safe haven currency underperformed the likes of USD and JPY amid signals the SNB stands ready to intervene. For the first time in four days, the euro was able to rise against sterling though. EUR/GBP reversed course after losses brought the pair in proximity of the 0.82 big figure to finish at 0.8283.The first thing that stands out from this morning’s Asian-Pacific session, is nickel’s meteoric rise part two. After searing 66% yesterday to 48000 USD/MT, prices in just a few hours of trading today are at an unprecedented 100k. Stocks trade 1-2% in the red. European markets are set for a dark red open (-3%). US yields give back early gains and the Bund future inches higher.
EUR/USD is pretty balanced. Commodity-driven currencies including AUD and NZD take a breather. The ongoing broad-based commodity melt-up stoking growth fears remains the key driver for markets for the time being. It will even dominate the ECB meeting next Thursday. As seen yesterday, rising inflation expectations could protect core bond yields’ downside. We remain cautious on EUR/USD’s short-term upward potential, both fundamentally as technically. The next reference is situated at 1.078.
News Headlines
NAB Australia Business confidence (13 from 4) and business conditions (9 from 2) improved substantially in February as the impact from the recent Omicron wave eased. The gains were widespread across several subindices of the survey, including employment (8 from -1) which is an important factor in the assessment of the RBA with respect to the start of policy normalisation. Purchase costs remained elevated, rising at a quarterly cost of 2.7% Q/Q. Rises in labour costs rose at the same speed of 1.7% Q/Q. Australian bond yields today rose substantially, but this was more due to broader inflation fears resulting from higher commodity prices. The 3-y yield and the 10-y yield both rose 9 bps to 1.66% and 2.23% respectively. Even so, the Aussie dollar this morning fell prey to profit taking after a good run of late, declining back below the AUD/USD 0.73 handle (0.7288).In a speech to the Australian Financial Review Business Summit, Australian Prime Minister Scott Morrison said the pandemic illustrated that the country should become more self-reliant with respect to key manufacturing. In order to be less vulnerable to supply chain vulnerabilities, the Australian PM earmarked seven areas where Australia should build out manufacturing capacity, including pharmaceutical and protective equipment and semi-conductors.
