Markets
Financial markets were more or less prepared for Russian military presence in the Donbas region earlier this week, but not so much for the current demilitarization on the rest of Ukrainian soil, probably with the aim of quickly installing a pro-Russian regime in Kyiv. The main moves occurred during Asian trading, but persisted during European hours. The jury remains out on the direction during the US session, but early indications suggest temporary relief at best. We start the market wrap-up on stock markets. Since the start of the year, they’ve experienced a bumpy road. First and foremost because of global monetary policy normalization. Second as geopolitics came into play. Apart from energy markets and Russian assets, stock markets so far proved to be most vulnerable to the conflict. Main European benchmarks currently lose 3% to 5%. The EuroStoxx 50 dropped below the 3867 pre-Covid high. A confirmed break in this week’s close suggests a return to 3608 (38% retracement on 2020-2021 rally). US stock markets open around 2% weaker. The S&P 500 extends a sell-on-upticks pattern while also dropping below the neckline of a bearish head-and-shoulders formation (<4140). Turning to commodity markets, Brent crude rallies impressively from $97/b to nearly $106/b, the highest level since August 2014. European gas prices rise nearly 50% intraday. The Dutch TTF Natural gas future trades around €125/Mwh from around €75 at the start of the week. Soft commodities like corn or wheat add around 5%. Both will aggravate the European/global inflation spiral and toughen policy dilemma’s for central banks. Metal prices add 3%-5%. The gold price surges from $1912/ounce to $1965/ounce. The 2020 top stands at $2063. Core bonds remained rather weak overall despite this year’s fragile risk climate. It tells a lot about the strength of the underlying trend. Also today, we think that gains actually could have been bigger. US Treasuries outperform German Bunds. European assets face some additional risk premium today. The US yield curve bull steepens with yields sliding 8.1 bps (30-yr) to 10.9 bps (2-yr). The US 10-yr yield tested this week’s low at 1.84%, but a break lower didn’t occur. German yields lose 3.6 bps (2-yr) to 6.4 (10-yr) in more of a bull flattening move. Bunds outperform swaps. Yield declines on the European swap curve are limited between 2.3 bps and 4 bps with the belly of the curve doing better than the wings. Peripheral yield spreads widen by up to 4 bps vs Germany with Greece (+8 bps) underperforming. The US dollar and Japanese yen keep a fine balance on FX markets after an early attempt of JPY to outperform. USD/JPY currently changes hands around the 115 big figure. EUR/USD dives from the 1.13 area to 1.1150 currently. The YTD-low at 1.1121 remains the line in the sand. EUR/GBP initially followed EUR/USD lower, but eventually the safe haven logic prevailed. EUR/GBP couldn’t force a test of EUR/GBP 0.8282 support and rebounded higher in the direction of 0.8360. EUR/CHF trades below 1.03 for the first time since the Summer of 2015.
Central European markets evidently facing the largest economic and monetary consequences of the conflict between Russia and Ukraine. They will sharply feel the dilemma between negative growth risks and the risk of a further acceleration of inflation that central banks are fiercely fighting since H2 2021. Since the start of the year, it looked that the Czech central bank, but also the Hungarian central bank and the Polish central bank finally could enjoy support from a strengthening currency as their policy tightening gained market credibility. This help from the FX-channel evaporated in no time with the Czech koruna this week losing 3.5% (against the euro), the Polish zloty ceding 3.5% and the Hungarian forint even declining 4.75%. Looking at pricing in short-term interest rate contracts, markets apparently conclude that especially the MNB and the NBP will come under pressure to raise rates even further to avoid the spiral of a weaking currency and rising inflation to reaccelerate. Hungarian and polish money market rates are rising about 35 bps and 20 bps respectively. The rise in Czech rates is much more limited even as markets again take into account a rise of the policy rate to the 4.75% or even 5.0% area. Markets are in the eye of the storm and will look for a new equilibrium in the next days. Even so, especially for the MNB and the NBP which finally gained some market credence in the anti-inflation crusade today’s developments are an ‘unwelcome reset’.
