Market movers today
The war in Ukraine continues to be the main focus with ebbs and flows in the prospect of a peace deal driving markets. EU leaders will meet for their summit in Versailles to discuss the economic fall-out from the Ukraine war and coordinate possible additional fiscal support measures.
On the data front we have US consumer confidence where both sentiment and inflation expectations will be key. With inflation continuing to rise the risk of a further rise in inflation expectations is clearly moving higher.
UK releases monthly GDP and we may also get Chinese credit data. But there is no firm date on the release so it might also come next week instead.
The 60 second overview
War in Ukraine: Earlier optimism about a possible agreement between Ukrainian and Russian governments faded, as the meeting between the countries’ foreign ministers yielded no results. Russian aggression continues as there is still no ceasefire or humanitarian corridors in Mariupol and the military column, which has been approaching Kyiv, is now being dispersed to new locations around the capital city. Oil and gas prices continued to moderate yesterday, as it seems that EU will not put on similar sanctions on Russian energy as US and UK. European natural gas futures declined to 126 EUR/MWh, or roughly half of earlier levels, while Brent has fallen below 110 USD/bbl. We remain sceptical that a diplomatic solution could be found in the near-term, and hence also expect that energy prices will continue to trade at elevated levels, see our latest scenarios in Research Russia-Ukraine – Updated scenarios and implications for commodity markets, 9 March. Yesterday some EU leaders, including Dutch PM Rutte and French president Macron also noted that Ukraine will not be allowed to fast-track the process of joining EU. Overnight, US is reportedly considering ending normal trade relations with Russia to set up even further sanctions, while the Senate yesterday approved USD13.6bn of military and humanitarian support for Ukraine.
ECB: European Central Bank surprised the markets yesterday by setting an end-date to the APP net purchases despite the uncertainty arising from the war in Ukraine. It was clear that the upside risks to inflation outweigh the downside risks to economic growth, although Lagarde emphasized high uncertainty and flexible decision-making going forward. The APP net purchases will be phased out, from EUR40bn in April, to EUR30bn in May to EUR20bn in June. Q3 purchase pace will depend on the economic and financial conditions at the time, but we expect ECB to halt the net purchases already in July. While Lagarde did not give hints about the timing of rate hakes, we still look for the first hike in December. Read more about the market reaction in the FI section below, and our more in-depth take in Flash: ECB Review – ECB never pre-commits, but stays data dependent, 10 March.
US CPI: US inflation continued accelerating in February, even though the figures do not even take into account the most recent spike in oil prices. CPI growth picked up to 7.9% y/y, driven largely by energy prices, but core inflation also remained brisk at 0.5% m/m and 6.4% y/y. Given the continuing broad-based inflation pressures we expect that Fed will have to tighten its monetary policy significantly this year despite the ongoing uncertainty.
FI: ECB took centre stage yesterday by surprising market consensus with an end date to the APP programme. The accelerated taper was in line with our expectations and left the periphery vulnerable where the BTPs-Bund spreads widened 16bp, which is the most since March 2020 when COVID broke out in Europe. Yesterday’s repricing in the BTPs-Bund spread marks a reversal of the positive sentiment after the media stories on the a potential new EU initiative for common funding earlier this week. We saw a significant bearish flattening with 10s30s EUR swap flattened 3bp to -15.8bp, but also the shorter-dated bonds selling off (Schatz +11bp). Front end repriced 9bp to 45bp for the Dec22 €STR. Seen over the day as a whole the Bund-ASW-spread ended virtually unchanged after recent weeks of elevated volatility.
FX: EUR/USD briefly bounced to 1.11 yesterday, where ECB came out slightly more hawkish than expected by the market. SEK has staged a comeback in recent days, which saw EUR/SEK drop towards 10.60 yesterday. Energy prices have stabilised albeit still at elevated levels.
Credit: Following a few days of cash bonds underperforming CDS indices, roles reversed yesterday. CDS indices closed in red, with iTraxx Xover and Main 14.5bp and 2.5bp wider, respectively, while HY bonds tightened 12bp and IG 2bp.
