Market movers today
Today IFO figures will give further perspective on the German slowdown in June indicated by PMIs on Friday. It will be interesting to see if they are as weak.
We will also be listening in to ECB president Lagarde’s speech on the ECB Forum on Central Banking in Sintra tonight.
Through the remainder of the week, the Riksbank meeting and euro area inflation data will be in markets’ focus.
We will also keep an eye on the situation in Russia, following the dramatic events over the weekend.
The 60 second overview
Russia: Over the weekend, all eyes were on Russia where an armed mutiny against the country’s military leadership instigated by Wagner group leader, Yevgeny Prigozhin, took place. Prigozhin and his troops started a ‘march of justice’ towards Moscow after easily seizing control of a southern city Rostov-on-Don early Saturday morning. President Putin threatened Wagner with a criminal charge for treason and announced tightening of legislation against those breaking martial law. As Prigozhin and his troops quickly advanced towards Moscow, the city was preparing to fence itself from the attack. However, eventually, the revolt was over in less than 24 hours when Prigozhin announced he had accepted conditions of a deal brokered by Belarusian President Lukashenko. As part of the deal, he would move to Belarus and all charges against him would be dropped. Overall, many open questions remain regarding Prigozhin’s motivations and objectives. It is unclear what has been agreed exactly and what will happen to Wagner group going forward. It is clear geopolitical risk has again raised its head and that Russia has become very unstable. We stress that the situation remains fluid. Yet, here is our best effort to understand what is going on: Geopolitical radar – Making sense of what is happening in Russia, 26 June.
Market sentiment: Asian markets mostly shrugged off geopolitical concerns and risk sentiment remains resilient ahead of the European markets opening. Euro is slightly stronger against the dollar and stock market futures are mixed, while gold and oil prices are only marginally higher. It is possible markets largely ignore the events in Russia at this point as it is still so unclear what really happened and at least the most chaotic scenario of Russia spiralling into a civil war has been avoided for now. However, we think geopolitical risks are now very much back on the agenda, and we highlight that rising instability in Russia could have very severe implications for Europe.
PMIs: Euro area June PMIs came in much weaker than expected on Friday as particularly service sector activity took a hit. Also, sub-indices showed both input and output prices declined despite the still persistent wage pressures in the service industry, which is good news for the ECB. The weak PMI prints are a surprise considering the otherwise solid macro data during the first half of the year. They could signal that higher interest rates are starting to pass through to consumption, particularly as savings buffers are gradually eroded. In the US, manufacturing PMI also surprised to the downside, but overall, the composite indicator held up above the 50 level, indicating economic growth.
Equities: Global equities ended lower on Friday across countries and regions. Defensives were outperforming but considering past period with strong cyclical outperformance, we find it surprising that defensives were not able to make a more solid outperformance. Banks and financials performing in line with market and hence investors were not increasing the recession fear but rather readjusting for higher for longer or a soft version of stagflation. We would have expected that markets had paid more attention to the very weak PMI prints. In the US, Dow -0.6%, S&P 500 -0.8%, Nasdaq -1.0% and Russell 2000 -1.4%. Asian markets are mixed this morning while European and US futures slightly stronger.
FI: On Friday, the weak European PMI set the stage for a significant rally with the 2y Germany declining 10bp to 3.1% and slightly more in the 5 to 10y area. The German curves continue to hover around the lows since 1992. Markets also repriced the front end ECB peak 5bp lower just below 4%. Through June, markets have added a full 25bp rate hike to the peak policy rate. Furthermore the ‘higher-for-longer’ narrative has pushed the point of policy rate cut further out, see also our discussion here: COTW: EUR liquidity tightening, kicking the can and higher for longer, 23 June.
FX: EUR/USD fell well below 1.09 on Friday following weak Eurozone PMIs. EUR/NOK recovery on Friday after the brief drop induced by Norges Bank’s big rate hike on Thursday. USD/JPY ignored a drop in 10Y US yield and oil prices and rose close to 144.
Credit: Soft PMI data sent credit markets into risk-off mode on Friday, despite a rally in underlying rates. Itrax main widened 1.5bp to close at 78.9bp and Itrax Xover widened 9.6bp to close at 417.6bp. The Xover close was the widest level in around three weeks. Primary markets were relatively quiet on Friday.
