Markets
At first sight, the context for global trading today wasn’t much different from yesterday. Except for a strong US services ISM (58.3 vs 58.5 expected), there were again hardly any data with market moving potential. Geopolitics continued dominating the headlines. What additional sanctions will western countries take in the wake of atrocities being committed as Russian troops left the Kyiv area and what will be the impact of retaliatory action from Russia, especially on EMU growth and inflation? Investors’ assessment to these questions varies from day to day. European equities return yesterday’s gain (-0.75%). US indices again outperform. The fear for new sanctions keeps Brent oil in a $105 p/b to 110 p/b range, but a new forceful break higher doesn’t occur yet. Yesterday, a similar narrative caused US and EMU interest markets to part ways, with the US yield curve bear steepening and Europe bull flattening on growth concerns. Today, the reaction function in different especially in Europe. The US curve again steepens, jumping between 5.5 bps (2-y) and 8 bps, mainly driven by real yields. Except for the US 30-y, yields at all maturities between 2-y and 10-y are only a few basis points away from the cycle peak reached about two weeks ago. The 10-y real yield even touched a new post corona top (-0.38%). German yields today join the steepening trend, rising between 4.0 bps (2-y) and 7.0 bps (10 & 30-y). However, at this side of the Atlantic the move is still supported by inflation expectations setting a cycle peak (10-y inflation swap 2.85%). Possible interpretation: EMU interest rate markets still keep the ECB under pressure not to get further behind the (inflation) curve, even as the crisis in Ukraine is causing additional doubts on growth. EMU swap yields even gain slightly more. Except for Greece, 10-y intra-EMU spreads also continue their widening trend with the likes of Portugal (+4 bpn) or Italy (+5 bp) underperforming.
The brisk move in interest rate markets again had little direction impact on the major FX cross rates. The dollar hardly profits from the ongoing rise in the real yields. USD/JPY (122.85) gains marginally. The trade-weighted DXY (98.9) even lost a few ticks. The euro remains in the defensive. EUR/USD dropped below the ST uptrend line near 1.0975, weakening the short-term picture, even as the absolute loss remain modest. Sterling showed remarkable strength today, gaining against the dollar (Cable 1.315) and the euro. EUR/GBP (currently 0.8335) did break a similar ST uptrend line as was the case for EUR/USD, with the correction low at 0.8296 next reference on the technical charts. The Aussie dollar gained sharply after the RBA dropped the language of being patient at today’s policy meeting. AUD/USD gains more than a full big figure (testing 0.7650). The kiwi dollar moves in sympathy touching the highest level since November last year (NZD/USD 0.7025). In Europe, markets apparently also see room for the Scandinavian currencies to profit for a catch-up move in policy normalization, with the EUR/SEK breaking the 10.30 support (currently 9.265). In Central Europe, the forint again underperforms (EUR/HUF 373.75) on headlines that Europe might trigger the rule of law mechanism against Hungary. News Headlines
The National Bank of Romania (NBR) raised its policy rate as expected by 50 bps from 2.5% to 3%, the highest level since the Summer of 2014 and thus exceeding the pre-Covid level for the first time. It’s the fifth rate hike in a row even as risks to the economic outlook increased because of the Russian war in neighboring country Ukraine. The Romanian near term inflation target deteriorated further with inflation running above 5% Y/Y, compared with a 2.5% +-1% percentage point target. The annual inflation rate is expected to rise somewhat more steeply in coming months (potentially double digits) than anticipated at the February meeting, under the impact of supply-side shocks. The NBR therefore continues to stand ready to use the tools at its disposal to achieve price stability in the medium term. Romanian government bond yields today add 10 bps to 4 bps in a bear flattening move. The Romanian leu is little changed at EUR/RON 4.94. The NBR uses a managed float of its currency, keeping it rather stable against the euro. Since 2014, EUR/RON in a very gradual manner rose from the 4.40 area to current levels.
