Markets
A month ago ECB president Christine Lagarde flagged the ECB would take a close look at the inflation scenario. If necessary, the review could lead to a reassessment of the ECB’s policy roadmap that was set out in December. One month later, inflation has developed in a way that probably the ECB deemed almost impossible. Today, the 10-y EMU inflation swap touched 2.80%, nearing the peak level of March 2008. In the current environment, this still might still result in the ECB holding a wait-and-see bias on Thursday, but that’s a different story. As such, the EMU inflation swap is catching up fast with the US measure which tested the 3.00% level. Today’s moves evidently was the result of another sharp rise in commodity prices as the weekend provided little perspective on the solution of Russian-Ukraine conflict and as the US signaled that it was considering a ban on Russian oil imports. Brent oil (currently $121 p/b) almost touched $140. European gas at some point jumped 75%+ compared to Friday’s close. More ‘modest’ but still exceptional rises were visible in a wide range of other commodities. Persistent geopolitical uncertainty combined with this new tax on (especially European) consumers and firms worldwide triggered a new sharp equity sell-off in Asian and early European dealings with the Eurostoxx 50 losing about 4.75% soon after the open. However, risk assets later in the session succeded a remarkable rebound (short squeeze?). Commodities also reversed part of the initial spike. Headlines on new talks between Ukraine and Russia maybe played a role, even as Russia is holding to the position that Ukraine should meets its demands. Germany rejecting the idea of a ban on Russian oil and gas maybe also helped. European indices currently reversed most of this morning loss (Eurostoxx + 0.25%). US indices are losing about 0.75%. Interest rate markets to some extent copied the gyrations in global risk sentiment. Even so, early declines in yields were modest given the sharp risk-off and core yields in the meantime even rebounded sharply. The US yield curve bear flattens with yields rising between 5 bps (2-y) and 1.5bps (30-y). German yields are moving between unchanged (30-y) and 5 bps for the 2-10 y sector. For the German 10-y yield a new test of the -0.1% area was again rejected (currently -0.015%). Interestingly, even intra-EMU spreads overcame initial risk-off and narrow slightly (Greece/Spain -2 bps).
Similar story on FX markets. The euro initially again felt heavy selling pressure with EUR/USD coming close to the 1.08 big figure. However, in line with the ‘risk rebound’, the pair currently again trades near 1.09. EUR/CHF temporarily dropped below parity, but is currently changing hands in the 1.01 area. Despite overall volatility, USD/JPY is holding a tight sideways range (115.23). Elevated commodity prices apparently prevent the yen from fully playing its safe haven role. Sterling staged a unconvincing performance today. Cable (1.3180) temporarily dropped below the December 2021 low and the intraday rebound lacks momentum. EUR/GBP (0.828) even trades marginally stronger compared to Friday’s close. In Central Europe the zloty and the forint touched new all-time lows against the euro. EUR/PLN even briefly touched the 5.00 mark. EUR/HUF halted just shy of the 400 barrier. At EUR/PLN 4.97 and EUR/HUF 393 the CE intraday rebound remains modest. EUR/CZK (25.70) held south of the 26.00 barrier as the CNB last week indicated to use its huge currency reserves to address unwarranted CZK weakness.
News Headlines
Some European Union countries are pushing back against giving Ukraine the so-called candidate status this week. Especially countries in the western part including the Netherlands and Germany first want the Commission to deliver its opinion on Ukraine’s readiness for such membership before taking any political decision. Focus in first instance should be on delivering practical support and ending the war instead of kicking off a process that could take a decade to finish. Ukrainian president Zelenskiy formally applied to join the EU end of last month. Nine countries, led by Poland and the Baltic nations have voiced their support to grant candidate status and start the lengthy process of admission. EU leaders will discuss Ukraine’s request when they meet on Thursday near Paris.
