Market movers today
Today markets will zoom in on US CPI data. April could very well mark the peak in US inflation but we will continue to watch mom moves closely. We expect a solid 0.5% mom increase.
In Sweden, we will look out for Prospera inflation expectations today and given the rise in inflation, an increase probably on all horizons could be seen especially in 1 and 2Y. Most interesting will be the 5Y horizon, last month was on 2.2%. This is probably an acceptable level for the Riksbank, but if we will see larger up-ticks from here it will for sure be uncomfortable for the Riksbank. The question is if the Riksbanks new rate path will have any impact.
The 60 second overview
Risk sentiment: Market rout is taking a breather despite growth concerns staying high on the agenda. News that new infections fell in Shanghai and that no community cases were reported (all new cases at quarantine centres) brought some relief as it raised hopes that some of the lockdowns could be loosened. According to Reuters, half of Shanghai’s 16 districts have achieved ‘zero Covid’ status. Asian markets are trading in green this morning.
Natural gas deliveries to Europe: Russia and Ukraine are clashing over natural gas deliveries to Europe via one of the main pipes in Ukraine, the Sokhranivka border point. Ukraine said it can no longer accept Russian gas transit through Sokhranivka from 7am local time on Wednesday as occupying forces control the territory. Russia supplies about 40% of gas to Europe and about a third of that is sent via Ukraine. On Tuesday, gas transit via Sokhranivka accounted for 27% of the total gas flowing via Ukraine, with the rest passing through Sudzha. While the Ukrainian system operator is saying gas could be rerouted through Sudzha, the Russian Gazprom said the switch is not possible. LNG deliveries and warm weather in Europe have kept gas prices in check in Europe, and prices have been range-bound in 90-110 €/MWh over the last few weeks, but now the dispute could add some pressure.
Economic outlook: Yesterday, ZEW index, the measure of economic conditions, painted a mixed picture of the German economy. The current conditions component continued to tumble to -36.5 in May from -30.8 in April, vs. consensus expectations of -35.0. More positively, the forward-looking expectations component recovered to -34.3 from -41.0 in April against analyst expectations (-43.5). Recovery in sentiment was broad-based across industries with exceptions in retail, construction and IT sectors.
Equities: Global equities more or less flat yesterday but some optimism came back as US growth stocks stopped the bleeding and implied volatility ticked a bit lower. Still a lot of intraday volatility as all the conflicting signals are challenging investors. VIX yesterday finishing north of 33, a level where VIX typically does not stay for very long. From current level one should either expect it moves higher or lower. The amount of observations being lower by far exceeds the number of observations above 33. Today’s US CPI number brings a good chance for either higher or lower volatility depending on how the data comes out at 14:30 CET.
Yesterday in US, Dow -0.3%, S&P500 +0.3%, Nasdaq +1.0% and Russell 2000 -0.02%. Asian markets mostly in green this morning and the same goes for both the European and US futures.
FI: The global bond market recovered some lost ground yesterday with bond yields declining as well as a spreads tightening between the periphery and core-EU markets. The 10Y BTPS-Bund spread tightened some 5-6bp and the spread is back at the 200bp level and our 2Y BTPS-OBL trade is back below 100bp, but we still have healthy gain on the trade. There was also a modest tightening of the iTraxx main and Xover. However, the Bund ASW-spread continues to widen even though rates were declining and the BPTS-Bund spread was tightening. Hence, we are getting close to testing the 90bp level.
FX: Commodity currencies continue to trade on the back-foot with NZD, NOK, AUD, CAD and MXN leading losses. EUR/USD has edged back closer to 1.05 while EUR/SEK remains close to the 10.60 level. EUR/GBP has been rangy around 0.8550 in recent sessions.
Credit: After some difficult days the credit market recovered slightly Tuesday with iTraxx Xover tightening 4bp to 465bp. Main was tighter by 2bp to 96bp.