Market movers today
We expect another leap higher in inflation in both Denmark and Norway, see more below.
In Germany, we will keep a close eye on ZEW expectations for May. A rebound from the depressed levels in April would be a welcome sign that the economy is not yet headed for recession.
We also have several Fed speakers on the wire. Here we will focus on the possibility of a 75bp hike. We will probably have to wait until after the CPI release on Wednesday to hear advocates for that, though.
The 60 second overview
Risk sentiment: Risk sentiment continued weakening on piling growth risks and rate hike worries, and equity markets declined broadly led by growth and cyclical sectors. Weakening demand outlook also caused oil prices to move sharply lower, with Brent now trading around USD104/barrel. Risk sensitive and commodity currencies weakened, with EUR/NOK moving back above 10.20. Bond yields also ticked lower, as the decline in commodity prices weighed on longer-term inflation expectations. Yesterday, the Sentix investor sentiment indicator declined more than expected to levels consistent with PMIs clearly below 50, and thus signalling rising recession risks.
Victory day aftermath: President Putin’s speech ahead of the Victory Day parade on Monday provided little insight into what the next steps of the Russian army could be. Fears of Putin declaring war or announcing mass mobilisation of troops proved unfounded for now. Despite being loaded with propaganda such as Putin claiming provocation from the West and NATO led to the war in Ukraine and him comparing the WWII atrocities by the Nazis to what ‘neo-nazis’ are now doing in Ukraine, the speech could not be interpreted as an escalation, nor as a de-escalation, for that matter. Rather, it seems Putin is preparing his domestic audience for a protracted conflict in Ukraine. While today’s speech was a relief as it did not signal immediate escalation, the threat remains, and Putin did mention nuclear weapons in his speech. That being said, we think only a severe escalation could return markets’ focus to the war, as a frozen conflict in Ukraine is largely priced in already.
EU sanctions: While fear of a demand slowdown is the key driver weighing on commodity prices this week, EU’s proposed embargo on Russian oil could also turn out to be less strict than what was initially proposed last week. Reuters sources suggested that the next draft would drop the ban on EU tankers carrying Russian oil, while some of the Eastern European states, Hungary, Slovakia and Czech Republic, already secured exemptions from the embargo until 2024. Even if the official embargo gets watered down, self-sanctioning by European oil buyers will have an impact on Russian supply, which will likely keep prices at elevated levels even amid rising recession risks.
Equities: Equity markets in bloodbath yesterday driven by US, growth, tech, small cap but also energy stocks were beaten down heavily as the stagflation fear turned into recession fear. Yields turned around during the day in massive intraday volatility and ended lower but this did lift the appetite for long duration stocks. Nasdaq at lowest levels since Nov-20 after 10% sell-off over past three sessions. Dow -2.0%, S&P 500 -3.2%, Nasdaq -4.3% and Russell 2000 -4.2%. Asian markets somewhat more positive this morning while Hang Seng doing some negative catch -up after the close yesterday. US and European futures are in green at the time of writing after being negative very early this morning.
There was a bullish steepening of the yield curves yesterday with 2Y German govt yields falling 9bp and 10Y falling 3.5bp. However, Germany continues to outperform the periphery and especially Italy, where the 2Y BTPS-Bund spread widened to more than 100bp and we reached the profit target on our recommendation to sell Italy versus Germany. There are some indications that ECB is working on a new tool to stop the fragmentation of the sovereign markets according to a news story on Bloomberg. However, given nothing is public yet, we expect that the spread widening can continue short-term.
FX: Risk- and commodity sensitive currencies suffered heavily in yesterday’s session with most notably EUR/NOK moving above 10.20 and EUR/SEK settling in the 10.60s. EUR/USD rose half a big figure to around 1.0560.
Credit: Overall credit markets had a weak start to the week with iTraxx Xover widening 7bp to 469bp. At the beginning of 2022 iTraxx Xover was trading at 242bp. Main was wider by 1bp to 98bp. At the start of 2022 Main traded at 48bp.
Nordic macro
Denmark: We expect Danish April CPI inflation increased further to 6.0% from 5.4% in March. We expect the primary driver to be the large increase in electricity prices that we saw in the spring. On top of that, the tobacco fee should be fully phased in with the April figures. We will also keep a close eye on food prices which have accelerated recently and are already at 6.3% yoy.
Sweden: In Sweden, there is an open hearing about monetary policy in the Riksdag Finance Committee starting at 10:00. All six Board members participate. We will listen for nuances on policy beyond what was provided in the minutes.
Norway: Given stronger global inflationary pressures and higher wage growth, Norwegian core inflation is likely to climb further in the coming months, and we expect core inflation rose to 2.4% y/y in April. That would be only marginally above the 2.3% that Norges Bank predicted in its March monetary policy report and should have limited market effects. That said, history has seen big movements in April due to Easter-related effects on food and transport, so the uncertainty is high.
