Market movers today
Focus remains on possible peace negotiations between Russia and Ukraine. Yesterday, we published the first part of a series of publications where we analyse the implications from the war in Ukraine, Research Russia-Ukraine: Updated scenarios and implications for commodity markets, 9 March. In our main scenario, we do not expect the conflict to spread to other countries and see commodity prices broadly moderating over the next six months. Also, as uncertainty mounts and inflationary pressures increase, have a look at our piece Research Global: Rising recession risk as yet another supply shock hits, 9 March.
A key event today will be the ECB meeting, where we will get important signals on how the ECB sees the current trade-off between inflation and growth. We expect the ECB to continue its path towards entering a ‘neutral’ monetary policy calibration and formally set an end date for the APP programme (in September this year), due to the high inflation pressure, but fall short of giving a firm indication of an upcoming rate hike, see ECB Preview – Inflation forces the normalisation process to continue, 3 March.
We also get US CPI. Although the data is for February and not incorporate the latest increase in commodity prices, it will give important input on the underlying inflation pressure.
The 60 second overview
Risk on: Markets turned risk on yesterday as President Zelenskyi’s deputy chief of staff Ihor Zhovkva hinted they would be open for diplomatic talks regarding the country’s neutrality, echoing comments made earlier in an ABC interview by Zelenskyi. Zhovkva said that the country is ready for a diplomatic solution but that they would not surrender a ‘single inch’ of their territory. As a pre-condition for any talks he called for an immediate ceasefire and withdrawal of Russian troops. Markets have clearly interpreted Ukrainian comments as encouraging signals that the two countries could be approaching some kind of an agreement. We still remain sceptical towards any diplomatic solution in the very short term, but as we discuss in our Research Russia-Ukraine: Updated scenarios and commodity price implications, 9 March, we think there will eventually be a truce and Ukraine will be forced into making painful concessions.
War developments: Ukrainian President Zelenskyi said at least 35,000 people were evacuated via the humanitarian corridors established on Wednesday despite problems in evacuations around the cities of Kyiv, Kharkiv and Mariupol. Russian air strike into a maternity and children’s hospital in Mariupol has been widely condemned and Zelenskyi has accused the Russian army of a war crime. The White House made a warning yesterday evening that Russia could use chemical or biological weapons in a false-flag operation in Ukraine.
Oil market: Extreme volatility continues in oil markets as Brent prices fell from USD 130 to around USD 110 yesterday. The United Arab Emirates said they will encourage fellow OPEC members to increase production in the middle of the supply crunch and price boom caused by the war in Ukraine and the sanctions against Russia. The UAE’s energy minister came out later and softened the comments saying the UAE remains committed to the OPEC+ agreement. According to sources, UAE had not consulted other OPEC members before making the statement, and Saudi Arabia, the de facto leader of the group, had no immediate response. The UAE has less room to raise output than Saudi Arabia, which thus far has been reluctant to ramp up production.
Equities: Tuesday finally brought a rebound, with European and US markets significantly higher. Peculiar sector mix with growth sectors rebounding hand in hand with oversold banks and autos. Defensives generally lagged, and energy the only sector lower. S&P gradually improved over the session S&P 500 2.6%, Nasdaq 3.6%, Russell 2000 2.7% and Dow 2%. Asian markets are mostly following the rebound this morning but US futures have dipped slightly lower.
FI: Yesterday, the risk sentiment turned strongly positive and yields across Europe rose sharply. 10Y German yield rose nearly 10bp with Italy tightening 4bp. The shorter rates rose slightly more than longer rates, flattening the curve by 1-2bp, on the outlook for central banks to be more hawkish on targeting the high inflation if global uncertainty will improve. Also on the back of positive risk sentiment, credit spreads tightened in line with rising equities and German ASW levels dropped 3bp.
FX: SEK and EUR gained vis-à-vis JPY and USD yesterday, which marked a first sign of turnaround in risk sentiment and stabilisation of commodity markets. EUR/USD remains bellwether for risk sentiment and trend in commodity markets; hence, unsurprisingly it bounced above 1.10.
Credit: The mood improved significantly in credit markets yesterday where particularly CDS indices saw substantial tightening. iTraxx Xover tightened 35.5bp and Main 7.3bp. Performance in cash space was somewhat less strong, but HY bonds still tightened 20bp and IG 1bp.
Nordic macro
Today brings Norwegian inflation data for February. Price rises have been volatile over the past couple of months but basically somewhat higher than expected. Part of the reason is that strong global price pressures have meant that import prices have held up better than might have been expected given the strengthening of the NOK during the autumn. We also know from various surveys that there are still substantial cost pressures working their way through the value chain, and wage growth looks set to be higher than anticipated last year. We therefore predict core inflation of 0.7% m/m in February, taking the annual rate up from 1.3% to 1.6%, with risk clearly tilted to the upside. This would once again be well above Norges Bank’s December forecast (1.2% y/y for February) and contribute to the expected upward revision of the bank’s rate path at the March meeting. That said, core inflation is still moderate and below the 2% target, so there is no reason for Norges Bank to panic.
