Markets
Energy is front and center to today’s market response following the Israeli-US bombings against Iran which killed several high-ranking officials including Supreme leader Khamenei. Bombings could last for weeks according to US President Trump as Iran fights back with attacks across the Middle East. One of those Iranian drone attacks targeted the world’s largest LNG export facility, prompting Qatar to shut down production. Gas prices were already trading 25% higher on the day, linked to the surge in oil prices, but they spiked to more than 50% above Friday’s closing levels after QatarEnergy confirmed the output suspension. In cutting its dependence on Russian gas, Europe made a huge shift towards the Middle East, exposing its energy-reliant economies once again. The European benchmark contract, the Dutch TTF future, currently trades at €45/MWh up from €32 at the end of last week. Brent crude changes hands around $80/b with traffic through the pivotal Straight of Hormuz grinding to a halt. Aramco also halted operations at Saudi Arabia’s largest oil refinery after a drone strike in the area. Interest rate markets learned their lesson from the energy crisis around four years ago. The additional inflationary impact (on top of current >2% levels) is something central bankers should be aware of instead of going with the “transitionary” talk. In the current inflation context, it outweighs potential second-round negative economic effects. While the Fed or the ECB obviously won’t immediately respond with a rate hike, money markets reposition towards a longer status quo in the US and by pricing out any remaining ECB rate cut bets. The likelihood of a March BoE rate cut similarly fell from 80% to 50%. The resulting market outcome is a bear flattening of yield curves. German yields add 5 bps (30-yr) to 8 bps (2-yr) at the time of writing. Daily changes in the US range between +5 bps (30-yr) and +7.5 bps (2-yr). The dollar gains the upper hand on FX markets, especially against currencies from energy-reliant (importing) nations. EUR/USD currently loses first support at 1.1743, testing the 1.17 big figure. The YtD low at 1.1573 is the next reference. USD/JPY tests the February high at 157.76, compared to a 156.05 close last Friday. Cable (GBP/USD) tested the YtD low at 1.3331. On a trade-weighted basis, the greenback (DXY) broke through 98 resistance to currently change hands around 98.50. The prospect of a longer and wider geopolitical conflict equally hurts overall risk sentiment with main European indices losing 2% to 3% while main US indices open up to 1% lower. The gold price initially rallied up to 2.5%, but fails to get over the $5400/ounce bar for now.
News & Views
The Czech manufacturing PMI showed operating conditions stabilizing in February. The headline index printed at exactly 50 up from 49.8. Production rose at the fastest pace in 4 years last month, but underlying data still indicated challenging demand conditions and cost considerations for manufacturers. Orders declined for the second consecutive month pointing to a less favourable sales environment and intense competition. Firms tried to better manage their cashflow by cutting employment and input buying again. Meanwhile, input costs continued to rise at a steep, albeit softer, pace. Greater operating expenses prompted firms to raise their selling prices at a sharper rate despite international competition (fastest pace in three years). The latter will capture the attention of the Czech National Bank as it ponders whether there is room for some (limited) further easing as headline inflation returned to/below the CNB target. The Czech 2-y yield today rises by 9 bps, but this mostly mirrors a global market repositioning. The koruna in a global risk-off context eased from EUR/CZK 24.24 to EUR/CZK 24.28.
The Hungarian manufacturing PMI rose from an upwardly revised 50 to 51.3. The index indicates modest growth in the industry, but remains below the historic average. New orders and production were reported higher. At the same time, the employment index remained in contraction territory. Purchase prices accelerated. Today’s PMI and a risk-off related decline of the forint (EUR/HUF 381 from 377) complicates the MNB’s approach of cautiously easing its monetary policy. The MNB last week cut its policy rate by 25 bps to 6.25%. The central bank indicated that this wasn’t the start of an easing cycle even as inflation dropped below the MNB target (2.1% in January). Financial stability remains an important topic for the MNB. The 2-y HUF swap rate jumps 11.5 bps (5.83%) today.
