Markets
Full-blown risk-on. Equities rallied like there was no tomorrow with gains in Europe reaching almost 8% (German Dax) and up to 3.6% on Wall Street (Nasdaq). The EuroStoxx50 (+7.44%) convincingly smashed resistance at 3608 and a minor reference located at 3742.5. It still trades below the pre-pandemic high though. Commodities including the likes of oil (Brent $111/b) and gas declined 13% and 27% respectively, easing concerns of its impact on the economy even though some damage has already been done. Gold was pummeled back below $2000/ounce.
Safe haven flows to core bonds reversed with German Bunds slightly underperforming USTs. The curve in Germany bear flattened with yields surging 12.3 bps at the front end (2y) and 10.4-10.7 bps in the 10y-30y sector. European swap yields added 3.6 (2y) to +-7 bps for longer tenors. The 10y yield even closed at a new recovery high (0.90%). US yields rose 8.2-10.8 bps across the curve with a late-session sprint after a $34bn 10y auction tailed slightly.
There was no stopping the euro yesterday. It excelled vs. almost all major peers. EUR/USD rebounded almost two big figures from 1.089 to close at 1.1076, thereby taking out first resistance of 1.104. EUR/JPY and EUR/CHF surged to well above 128 and 1.02 respectively. EUR/GBP closed near the 0.84 area – the highest level in a month. Central-European currencies extended a sharp comeback after hitting 9-month (CZK) or even record lows (HUF and PLN).
The trigger for such huge market moves was probably a combination of elements. Investors apparently concluded that the barrage of western sanctions and Russian countermeasures may at least take a break after some of the most harshest were already taken by now. Ukraine also kept the door open to discuss country neutrality, a key demand by Russia to stop the war. Specifically for Europe, preliminary plans for another joint bond issuance to finance the energy transition and defense spending boosted risky assets in the region.
Whatever the reason, it is also supporting Asian-Pacific markets this morning. Stocks jump with Japan outperforming (+4%). Core bonds lick their wounds. The euro retains most of its stunning gains yesterday as it awaits the ECB policy meeting later today.The March ECB meeting should have been an official turning point in monetary policy. However, the war in Ukraine spewed an enormous layer of uncertainty over the economy. But it also spurred commodity prices significantly, putting already-elevated inflation under additional upward pressure which will have to be addressed one way or another.
As a compromise, policy normalization plans as hinted by president Lagarde in February will probably be merely postponed until the ECB has a bit more clarity on the situation. This could be just one month (next meeting April 14). In any case, our scenario of ending QE in Q3 followed by a rate hike in Q4 still stands. In light of recent market talk, we thus see a chance for a hawkish surprise.
The market reaction, however, will be clouded by the release of US CPI (7.9% consensus) around the same time. We believe the upward surprise here has to be sizeable for markets to reconsider a 50 bps hike by the Fed next week.
News Headlines
In South Korea, the candidate of the conservative opposition Yoon Suk-yeol won the election to become president of the country. He secured the victory over the candidate of the ruling centre left democratic party by a historic low margin of 1.0%. The new president will have try to unify the country after a bitter political fight. However, he faces challenges to implement a new policy as the party of former president Moon retains a majority in Parliament. Important domestic policy issues include energy policy, housing and real estate prices and taxes. The new president is seen as favouring a more market oriented, less regulatory approach. With respect to international policy, he is expected to take a tougher stance in its policy to China and North Korea.The February wholesale prices suggest that inflation is also gradually reaching Japan, even before the sharp rise in commodity prices. Japan PPI wholesale prices jumped 0.8% M/M to be up 9.3% Y/Y, according to data from the Bank of Japan, the fastest pace since 1980! Higher import prices (25.7% Y/Y) are filtering into domestic economic activity. With wage rises still modest, inflation is at risk to further weigh on already mediocre consumer spending.
