Markets
A summer lull is the well-known phenomenon of a short period of calm in which little happens. Afterwards, business picks up again. Lesser known is the spring lull. In case you wondered, we’re in the middle of it. Core bonds are trading rangebound and stock markets cede some ground after testing important resilience levels earlier this year. The dollar manages to regain momentum as the relative yield spread (US/GE 2y) is correcting back in the greenback’s favour. EUR/USD fell to the lowest level since early April around 1.0820. The 100d simple moving average provides support as it did in March. EUR/GBP follows EUR/USD south with the pair remaining below support lost last week around 0.8720. BoE governor Bailey spoke at the Global Annual Conference of the British Chambers of Commerce, but his speech lacked guidance for June. “While we expect CPI inflation to fall quite sharply as energy costs begin to ease, albeit at a somewhat slower pace than projected in February given the near-term outlook for food prices, the outlook for inflation further out is more uncertain and depends on the extent of persistence in wage and price setting.” The UK central bank is firmly in data dependence mode. Bailey specifically mentioned trends in wages, job vacancies and core inflation.
The current spring lull bridges the period between May policy meetings by ECB/Fed and first relevant datapoints for the June updates. A 25 bps ECB rate hike and a conditional Fed pause are the benchmarks against which they’ll be checked. Next week’s EMU PMI’s are the amuse-bouche ahead of EMU inflation and US payrolls thereafter. Simultaneously with the eco pause, regional US banking shares are recovering from the lows as they gradually see some new deposit inflows. Everybody’s talking about the US debt ceiling debate with X-date (default date) early June, but apart from US T-bills and US CDS levels, there’s no sign of stress. Markets probably aren’t worrying until we’re effectively days/hours away from a default. All of this combined creates the low volatility spring lull we’re currently in.
News & Views
The deal under which Russia allows Ukraine safe grain export from its Black Sea ports lapses on Thursday. The UN and Turkey brokered the deal in July last year for an initial 120 days in a bid to prevent a global food crisis from escalating. The deal was extended in November for another 120 days and then for 60 days back in March, helping corn prices ease from multiyear highs of >$800/bushel mid-2022 to $571 currently. Russia had threatened to quit the deal as restrictions on payments, logistics and insurance posed a barrier to shipments, even as Russian exports of food and fertilizer are not subject to Western sanctions. Bloomberg, citing Turkish officials, in the meantime reported that the deal is set to be extended anyway. An official announcement should follow later today.
Hungary’s foreign minister Szijarto said it will block a further €500 million tranche of European financial assistance to Ukraine for now, adding that it is also reluctant to back further sanctions against Russia. One of the reasons underpinning the decision was Ukraine’s move to add Hungary’s largest lender to its list of international war sponsors and as such risk harming the lender’s reputation. As long as this is the case, Hungary “can’t support decisions requiring new economic and financial sacrifice on the part of the European Union and its member states”. The Hungarian forint lost ground after Szijarto ‘s comments with EUR/HUF bouncing of critical support just below 370 to 371.3 currently. Investors fear it will further complicate the disbursement of billions of EU funds to Hungary – which are officially blocked over a rule of law dispute. But the country’s stance vs Ukraine (aid) has often been to the dismay of the EU which has previously used the blocked resources as a leverage in the discussions.
