Markets
At the start this morning, it looked that trading would continue on yesterday’s risk-off script. Volatility remained elevated and so were energy/commodity prices. Uncertainty was fueled further by comments from Russian officials that the country could cut off gas delivery to Europe in response to European sanctions. However, fortunes changed early in European dealings. Bloomberg reported that the EU might soon present a new large-scale funding scheme (bond issuance) to facilitate the energy transition and to finance defense spending. The plan might be discussed at the EU Summit in Versailles later this week. Concrete details including on the size of the program are not available yet. Even so, European equities switched losses of more than 1.0% to touch intraday gains of 2.0% soon after the report. Gains partially evaporated later. The Eurostoxx50 gains about 0.50%. Italian and Spanish equities outperform. US indices show an indecisive pattern at the open. The impact on interest rate markets was more pronounced/sustained. Yesterday, EMU yields already trended higher due to a sharp rise in inflation expectations, despite an outright risk-off context. If (EU) fiscal policy would play a bigger role in mitigating the growth impact of current crisis monetary policy (the ECB), ceteris paribus, has more room to try to arrest runaway inflation. The German yield curve sharply bear steepens with yields rising between 8.5 bps (2-y) and 15.5 bps (30-y). The rise was both due to still higher inflation expectations and a more modest rise in the real yield. The prospect/hope on more funding at EU level also favoured non-core EMU bonds. 10-y spreads versus Germany narrow 19 bps for Greece, 13 bps for Italy and 9/8 bps for the likes of Portugal and Spain. US yields show a similar, but more modest move rising between 3 bps (2-y) and 8.5 bps (10-y). This rise is also still mainly driven by inflation expectations. Commodities are trading ‘mixed’ but still holding near recent peak levels. Brent hold hovers near $130 p/b.
The headlines on potential large scale EMU funding also help to put a floor for the euro. However, gains are far from impressive. EUR/USD currently trades near 1.0915. DXY hovers near the 99.00 big figure, slightly off yesterday’s ST peak. The rise in US and EMU yields this time also weighs on the yen with USD/JPY rebounding to 115.65 and EUR/JPY regaining the 126 big figure. After yesterday’s ‘U-turn’, sterling underperformance against the euro continued today with EUR/GBP trading at 0.8320. The headlines on EU funding also were a welcome bonus for CE currencies with EUR/CZK (25.66), EUR/PLN (4.88) and EUR/HUF (389) all easing of recent peak levels. However, the jury is still out whether this ‘new theme’ will be enough to cause a sustained U-turn. In the meantime, the National Bank of Hungary (MNB) widened the top of the rate corridor (from 5.4% to 6.4%) creating room to further raise the deposit rate on Thursday.
News Headlines
A bipartisan group of US senators introduced a bill to prevent Russia from liquidating gold by applying secondary sanctions to any American entities that knowingly transact with or transport gold from Russia’s central bank or sell gold (physically or electronically) in Russia. The group wants to close the loophole where the CBR’s $150bn (today’s prices) in gold reserves is used to withstand current sanctions. “By sanctioning these reserves, we can further isolate Russia from the world’s economy and increase the difficulty of Putin’s increasingly-costly military campaign”, the senators said. The Russian central said shortly after last week’s EU/US draconic sanctions it would start buying gold again. As per end January, Russia had more than 2000 tons of gold IMF data showed.
UK think tank Resolution Foundation said UK households face the biggest decline in living standards since the 1970s oil shock as the Ukraine crisis deepens the cost of living crisis. Due to the jump in gas and oil prices, inflation could exceed 8% this spring, the research group said. Wage growth neared 4% according to the latest labour market report, resulting in real incomes dropping more than 4%. The Foundation proposed UK Chancellor Sunak to front-load benefit increases which are linked to inflation this year and deliver smaller gains in 2023 to smoothen the impact.
