Markets
Core bonds parted ways today. While German Bunds recovered slightly from the past session’s beating, US treasuries ceded slightly ground in a positive risk environment. Main European indices gain up to 1.5%. The EuroStoxx50 is a whisker away from last year’s recovery high at 4415. Daily changes on the US yield curve currently range between +1.2 bp (2-yr) and +4.3 bp (30-yr). German yields lose 1.9 bps (2-yr) to 2.5 bps (10-yr) in a bull flattening move. 10-yr yield spread changes vs Germany are broadly unchanged with Ireland (+4 bps) underperforming. Italy (Sep2052) and Slovenia (2026&2062) are the first (EU) sovereigns to hit the market with new (syndicated) deals. Both are expected tomorrow. Today’s European eco calendar was empty, but the December US manufacturing ISM later today kickstarts an interesting data week, especially in the US. Apart from the non-manufacturing ISM and minutes of the December Fed meeting, we get the monthly labour update with ADP employment change and payrolls. The EMU agenda centers around monthly CPI numbers on Friday.
The dollar tried to build on yesterday’s momentum, but moves don’t drag that far. EUR/USD earlier failed to break through the upside of the sideways trading range in place since Q4 2021 (1.1186-1.1383) with relative yield dynamics helping the greenback out. EUR/USD currently changes hands at 1.1285 from an 1.1297 open. USD/JPY is propelled higher in the positive risk environment with the pair trading north of 116 for the first time since January 2017. Sterling outperforms all other majors as UK yields make a catch-up move with EU/US yield developments after yesterday’s Bank Holiday. UK yields add 6.8 bps to 9.5 bps with the belly of the curve underperforming the wings. The UK 2-yr yield tests last year’s high at 0.75% as the probability of a follow-up rate hike in February increases. EUR/GBP gives away support at 0.8381 to drop to 0.8344 currently, the lowest level since March 2020. Next support stands at 0.8282. CE currencies enjoy the risk-on boost. EUR/CZK falls below the March 2020 low (24.77) to 24.70, the strongest CZK level since 2012. The hawkish reaction function of the national bank (eg 100 bps rate hike in December) also grants CZK the relative real rate advantage. EUR/PLN declines to 4.56, the lowest since October in anticipation of a hawkish hike by the NBP later today. Finally, sentiment is even improving for the forint after an extensive test of the EUR/HUF 370 resistance area. The pair dropped below 365. An easing of tensions on the FX market will especially be welcomed by the central bank as it would allow time for pause in the weekly hiking cycle of the 1-week deposit rate (de facto key rate instrument). It currently stands at 4% and risks bumping into the 4.4% marginal lending rate ahead of the next MNB decision (Jan 25). At the end of last year, the central bank needed to widen the interest rate corridor at an intermediate ad hoc meeting to side-step the problem. News Headlines
Dutch gas futures soar another 15%+ today after jumping a similar amount yesterday. The strong two-day move follows a sharp 60% decline during the final part of 2021, when unusually mild weather curbed demand and flurry of US LNG cargoes supported supply. The reignited gas rally comes as supply from top seller Russia plunged this week amid heightened geopolitical tensions with the EU over Ukraine. To make matters worse, some nuclear capacity in countries including France was brought offline for repairs and maintenance ahead of the coldest months of the year.
OPEC+ stuck to the script of restoring previous output cuts and agreed to bring an additional 400 000 b/d to the market in February. The decision comes even as OPEC still expects a supply surplus for the first three months of the year. However, it will probably be less than expected earlier. In addition, much of the fuel inventories in developed countries are currently at low levels, a delegate said, and they may thus choose to replenish. It should also be noted that overcompliance with OPEC’s production cuts were estimated at 117% for November (last data) as some countries struggle to ramp up supply. Some of the agreed output increases thus don’t make it to the market.
