Markets
Markets were mostly chewing on the ECB’s message during Friday’s European trading session. Behind doors stories emerged suggesting a broadly 15-10 split in favour of the more hawkish ECB flank. Especially the significant rise in market-based inflation expectations since the early February meeting supposedly tilted the balance. The EU 10y inflation swap for example surged from near 2% to a peak of 2.8%. European yields remained in the lift with the EU 2y swap rate setting a new multiyear high above 0.25% and the 10y benchmark testing the psychologic 1% mark. Trading dynamics changed over US trading hours when risk sentiment turned risk-off again, providing a bid especially for longer dated bonds. The EMU swap curve flattened with daily changes ranging between +2.9 bps (3-yr) and -2.2 bps (30-yr). German Bunds outperformed with the curve bull flattening (yields dropping 2.1 bps to 3.4 bps). US Treasuries underperformed in the run-up to this week’s FOMC meeting with daily changes from +5.2 bps (2-yr) to -1.3 bps (30-yr). EUR/USD during the US session tanked from an intraday high around 1.1040 to a close just north of 1.09. Key US stock market benchmarks lost over 2% for the Nasdaq compared with positive closing levels in Europe.
Asian bourses trade mixed this morning with China significantly underperforming after the country placed the southern city of Shenzhen (technology hub) into lockdown for at least a weak. The dollar’s strength is again most outspoken in the USD/JPY combination. The pair on Friday broke above 116.35 resistance and this morning closes in on the 118 big figure for the first time since end 2016. Next resistance stands at 118.66 (2016 top). Reuters already reports that the Japanese government stresses the importance of the a stable currency and that it is eying the impact of a significantly softer yen on the economy.
In a broader context, there’s little to add on the situation in Ukraine. From a market perspective, this implies no reason to exit the better safe than sorry thinking. The eco calendar is empty today with market focus on this week’s monetary policy meetings in the US and in the UK. Markets no longer contemplate a 50 bps Fed rate lift-off and discount a 25 bps move. Indications on the (speed of the) balance sheet run-off, the terminal rate and the number of follow-up rate hikes to tackle decade-high US inflation will be key further out. In any case, we think that (global) policy normalization continues to serve as strong counterweight against potential upticks in risk aversion. This suggests a persistent fragile stock market environment and more weakness for core bonds. The jury in FX space remains out. The ECB in theory solidified the floor below EUR/USD medium term, but in a short term perspective the dollar could hold the upper hand. Support stands at 1.0806 (2022 low) and 1.0636 (2020 low).
News Headlines
In an interview on Sunday, Russian Finance Minister Siluanov said his country lost access to around $300bn of its total $640bn gold and FX reserves due to sanctions imposed by Western countries. In this context, the Minister said that Russia will continue to fulfil its debt obligations. However he indicated that the country will pay roubles to its debt holders, rather than in USD or other currencies until the state reserves are made free again. Russia also looks for support from China as the West is putting pressure on China to limit access to reserves in yuan. Today, the US National Security adviser Jake Sullivan will meet in Rome with a top diplomat of the Chinese Polit bureau.
Corona infections continue to impact life and economic activity in China. Chinese authorities have imposed a lockdown on the City of Shenzhen, home to a about 17.5 mln people. The region is an important Tech hub. So the lockdown may cause additional supply issues. Covid cases in the country are also rising again in several other cities, including Shanghai. The impact on activity raises the chances that the PBOC will ease policy further in the near future. End last week, February credit data in China slowed more than expected.
