Market movers today
There are no tier-1 global movers today but focus remains on developments in gas and electricity prices alongside developments in Ukraine (see more below).
Danish august CPI inflation is released. We expect the number to increase to 9.1% from 8.7% in July. The increase is driven by a continued pressure on core inflation and food prices in particular. Pushing higher is also the new quarterly rent registration, which will likely show an increased pressure for rent hikes. Lower electricity fees introduced over the summer reduces the consumer price by 4%, which pulls in the other direction. So does a 9% decline in fuel prices. It will be interesting to see if the very modest clothing sale over the summer was an indication of higher prices, or whether it corrects in August.
All eyes this week will be on US inflation on Tuesday, which is one of the last important data releases before the Fed will decide on a 75bp or 50bp hike at their meeting next week. Our call remains for a 75bp hike. US retail sales and the German ZEW index will also give further clues to the outlook for recession in the US and the euro area, respectively.
The 60 second overview
European energy crisis. On Friday EU energy ministers held an emergency meeting to discuss the evolving energy crisis in Europe. Five initiatives were discussed and the topics of power savings and marginal pricing in the energy market took centre stage.
Four of the five initiatives were endorsed by EU ministers including 1) electricity savings in peak hours, 2) a cap on excess revenues from cheap energy producers, 3) a “solidarity mechanism” to capture excess revenues from fossil fuel companies and finally 4) a liquidity state aid programme to aid utilities businesses. The fifth and final proposal to cap prices on Russian gas imports did not get enough support amid a broader support to extend natural gas price caps too all imports irrespective of geographical origin. However, some countries still oppose to price caps arguing it would only incentivise consumption possibly worsening the current inflation problem. Also price caps on all natural gas imports could deter LNG exporters from exporting to Europe. Legal text now has to be finalised this week.
War in Ukraine. Over the weekend, Ukraine launched a successful counter-offensive against Russia in the Kharkiv region. The north-eastern offensive followed a tactical disinformation campaign started by the Ukrainian army two weeks ago that they were launching an offensive in Kherson region, in the country’s south. As it appears, the southern offensive was a trick and just as Russia was moving its troops to the south, Ukraine managed to catch the Russians off guard in northwest where Russian troops subsequently panicked and fled.
In less than five days, Ukraine has managed to retake more territory than the Russian army could occupy in four months. We think it is too early to call whether the conflict has reached a turning point. We still consider a frozen conflict as the main scenario in short term (3-12 months) but see three alternative scenarios: 1) With continued support from its Western allies Ukraine succeeds in pushing the Russian troops back behind the pre-war frontline in Donbass without any territorial concessions. 2) The two sides strike a peace deal entailing territorial concessions for Ukraine. 3) Russia steps up its use of brutal force as it strives not to lose face, marking an escalation. The scenarios could overlap and other in-between scenarios could also play out. We will discuss these nuances more in an upcoming briefer on the War in Ukraine.
UK. On Friday, the Bank of England announced that the upcoming Thursday monetary policy meeting is postponed by a week due to a period of national mourning following the death of Queen Elizabeth II. The Committee’s decision will now be announced at 13pm CET on 22 September. This also means that sales of APF corporate bonds now will start one week later than previously announced, with the first operation to be held on Tuesday 27 September 2022.
Sweden election. Preliminary result of the Swedish general election 2022: The right-wing parties has a lead of 1 mandate (175) vs red-green (174) preliminary. The big winners are Sweden Democrats (yellow) and Social Democrats (light red). The bid losers are the Centre Party (dark green) and to some extent the Left (dark red). The Greens (light green) and the Liberals (light blue) stayed above the 4% threshold. The blue-yellow constellation will now probably start a negotiation process with the blue parties forming a government with the yellow giving support but being outside the government (despite is now the second biggest party). Sweden Democrats will however have a big impact on policies, most likely.
Equities: Equities finished last week on a strong footing with all regions and all sectors higher. No surprise to see the cyclical growth universe outperforming as risk sentiment recovering. VIX index lower for the third day in a row, finishing just south of 23. In US on Friday, Dow +1.2%, S&P 500 +1.5%, Nasdaq +2.1% and Russell 2000 +2.0%. The positive tone continuing in Asia this morning while European futures also indicate a green opening. US futures unchanged this morning.
FI: Last week was another dramatic week in the global financial markets with the ECB meeting as the highlight of the week. One of the big moves was in the Schatz ASW-spread that tightened some 25bp. The move was driven partly by the announcement from ECB that governments will get either the depo rate (at 75bp) or €str which are both well above 0%.
FX: Last week ended with value currencies in Europe such as NOK, SEK and EUR performing well while the USD was the big underperformer. EUR/USD is trading back close to 1.01, EUR/NOK has come down below 10.00 while EUR/SEK has broken through the long-tested 10.70 support level. USD/JPY has come off historical highs trading close to 143.
Credit: Credit markets ended the week on a slightly positive note as market participants continued to digest the 0.75% ECB rate hike. Overall on market level iTraxx Main was 5bp tighter while Xover was 24bp tighter.