Markets
An awful close on WS Friday and a new batch of negative data on China economic growth (composite PMI and non-manufacturing PMI both tumbling further into contraction territory to 42,7 and 41.9 respectively) were a bad omen for sentiment at the start of the new trading week. Investors in risky assets also still ponder additional headwinds for growth due to further mutual retaliatory sanctions between Russia and Europe. European equities opened with losses of 1.0%+. A reportedly Nordic driven-driven (short-lived) flash crash didn’t help to calm nerves. Neither were EC confidence data. Economic confidence (combination of consumer & business confidence) declined further from a downwardly revised 106.7 to 105, the lowest level since March last year. Business sentiment series eased but still showed some resilience. However consumers clearly are unsettled by persistent uncertainty on the war in Ukraine and inflation eroding purchasing power (-22.0 from -16.9 ). European equities maintained a downside bias with the EuroStoxx currently losing about 2.0%. US futures initially tried to regain a few ticks after Friday’s sell-off, but cash markets open marginally in red. The risk-off/fear for some kind of a stagflationary context again hardly caused any safe haven bid for core European bonds. The German curve steepens, with the 2-y declining 2 bps but the 10-y/30-y still rising marginally (2.1/2.8bps). European swap rates simply continue their uptrend, with the 10-y setting a new cycle peak near 1.77%! Intra-EMU spreads versus Germany show a mixed picture, but the steepening in the EMU curve clearly doesn’t help LT spreads. Italy again underperforms (10-y, +6 bps vs Germany). At 2.84%, the yield spike at the peak of the corona panic is coming with reach. The US yield curve also bear steepens as expected decisive Fed action raises real yields (10-y real yield again in positive territory at 0.06%). The 2-y rises 1 bp. The 30-y (+5 bps) again surpasses the 3.0% mark. An easing in some cyclical commodities including oil (Brent $103.51 p/b) or copper for now hasn’t any meaningful impact on the trend dynamics in core interest rate markets.Moves in the major FX cross rates were rather guarded today. The DXY USD-index regains part of Friday’s correction. At 103.50, the cycle top of 103.93 is again within reach. USD/JPY tries to regain the 130 barrier. EUR/USD struggles not to fall back below the 1.05 handle, with last week’s low (1.0472) last intermediate support ahead of the 1.0341 2017 low. Sterling still slightly outperforms the euro (EUR/GBP 0.8375) as markets assume that the BoE can’t afford to stay on the sidelines despite the cost of living crisis eroding growth and consumer spending. The risk-off also weakens the CE currencies (EUR/CZK 24.68; EUR/HUF 380.4, EUR/PLN 4.691) even as the CNB and the NBP are expected to continue their anti-inflation crusade later this week. News Headlines
The Ukrainian central bank urged Kiev to rely on other sources of finance to shore up its economy and fund the war. The monetary authority began direct purchases of government bonds after the war erupted late February and added in April 50bn hryvnia (some $1.7bn) to its debt portfolio. This brings the tally to 70bn so far. For now, printing money is justified and used to finance “critical” government needs only, deputy governor Nikolaychuk said. But he added that once signals of overheating, including soaring inflation, emerge, it will be a signal to stop. The central bank lifeline turned out to be the third most important source of funding, after war bonds and IMF loans.Japanese institutional investors are offloading US Treasuries by the billions. Over the past three months (until the week of April 22), they sold about $55bn, Japanese data showed last week. That amount is expected to grow in the coming weeks/months: extreme divergent US/Japanese monetary policy has sent the yen into the abyss (USD/JPY 130.07 today). The sharp spike in volatility causes currency-hedging to become so expensive that it dents the appeal of higher US nominal yields. The effective yield today is about as high as one year ago, even with the US yields surged ever since. Combined with the unusual high amount of uncertainty about inflation as well as the historic pace of Fed tightening, it may keep US bond buyers in Japan sidelined for a little while longer.
