Market movers today
Today we get the euro area consumer confidence from March, an early signal of how consumer sentiment has been affected by the war in Ukraine. Consensus expects a drop to -12.9 from -8.8 in February. Otherwise, another quiet day on the data front.
Given what looks like a frozen conflict in Ukraine for now, markets are also eyeing other topics. Today we have two ECB speakers, Nagel and Visco, on the wires. Also, Fed’s Bullard discussing US economic outlook in the evening.
This morning, we published a note where we discuss the economic implications from the war in Ukraine on Russia, see Research Russia: EU embargo on Russian energy could be a game-changer, 23 March. We highlight that the EU still has room to substantially add pressure on Russia by imposing an energy embargo. Furthermore, the ‘Fortress Russia’ policies have already significantly weighed on households’ living standards and the war ensures that weakness will persist for years to com
The 60 second overview
Fed: The Fed’s new mantra seems to be “get to neutral as fast as possible”, as FOMC members continue to talk about front-loading rate hikes and even doves like Mary Daly are now calling for tighter policy. No FOMC member is ruling out 50bp rate hikes at this point. With the Fed behind the curve and still high inflation, we see an increasing probability that the Fed will tighten more and faster than we have pencilled in (i.e. risks are skewed towards the Fed hiking by 50bp in both May and June or 75bp in one go). Tighter monetary policy (and financial conditions) and the commodity price shock increase the risk of a global recession 1-2 years down the road, which is also reflected by the very flat US yield curve.
Western sanctions: US President Joe Biden and G7/NATO/EU leaders are meeting in Brussels tomorrow and they are expected to announce new sanctions against Russia, see FT.
Equities: The positive correlation between yields and equities continued, with equities posting solid gains. Risk on with a slight value outperformance – but only mildly so. As a whole, value outperformed growth by around 0.5pp globally despite the US 10y breaching 2.40%. This can be compared to 7pp during the most intense rotation days in January. This summed up to a peculiar sector performance with both financials, consumer discretionary and communication services in the lead. S&P500 1.1%, Dow 0.7%, Nasdaq 2% and Russell 1.1%. Asian markets are continuing its rebound and US futures point slightly upward.
FI: Risk sentiment was positive yesterday and sent yields higher across the board in a bear flattening move. Bunds touched above 0.5% for the first time since 2018 as inflation gained again although energy prices were broadly stable yesterday. US 10yr Treasury yields are now trading around 2.4%. Front end rates sold off again, where the ECB pricing now has 53bp priced for this year, mostly driven by the spill-over from the US after Powell’s comments on Tuesday preparing the grounds for a more aggressive calibration in May/onwards.
FX: USD/JPY continue to see upwards pressure as yields rise. Expectations are running high for a hawkish message at tomorrow’s Norges Bank meeting.
Credit: Risk-on continued in credit markets yesterday with iTraxx Xover and Main 11bp and 2bp tighter, respectively. HY bonds closed the day 9bp tighter and IG 1bp.
