Markets

What a difference a day makes. Yesterday, the announcement by the United States of a ban on fossil fuel imports from Russia nevertheless caused some caution on the American stock markets. Today, investors apparently concluded that this action could be the harbinger of at least a pause in the retaliatory dynamic between Russia and the West. The astonishing rally in commodities has finally slowed down. At $122 a barrel or $1,230 a bushel, commodities like Brent oil, wheat and other commodities are certainly not cheap and continue to deeply erode consumers’ disposable income. Even so, the pause was enough for bearish buyers to return to equity markets. Whether this decision will endure given the potential negative impact of the “commodity tax” on growth remains open. Either way, European indices are recovering to 5.0%+. US indices, which have suffered less lately, open with gains of up to 2.2% (Nasdaq). Earlier this week, core yields rebounded as rising inflation expectations outpaced falling real yields due to broad risk aversion. Today, yields extend their northward march, but the current move is driven by a rebound in real yields. Inflation expectations are stabilizing (US) or falling slightly (EMU). German returns gain across the entire curve (2 years +10 bps; 5 years +8.5 bps; 30 years +9.5 bps). The bund-swap spread is narrowing. Intra-EMU spreads narrowed yesterday after reports of a new EU funding plan. This trend continues today despite rising base yields. Greece’s 10-year spread against Germany eased another 6 basis points. The Italian spread tightened by 4 bps. European investors are now eagerly awaiting tomorrow’s ECB meeting for clues on the ECB’s anti-inflation tactics. US yields rise between 3.75 basis points (30 years) and 7.5 basis points (5 years) ahead of the February US CPI release. Later today, the US Treasury will sell $34 billion worth of 10-year notes. Yesterday’s 3-year stock received only lackluster investor interest despite the recent rise in yields.

On FX, Currencies that suffered the most from the Ukraine crisis also received further relief today. EUR/USD regained the 1.10 barrier (1.1035) after filling offers just north of 1.08 north just two days ago. The single currency is also bouncing strongly against safe havens with EUR/CHF trading at 1.024 and EUR/JPY surging towards the 127.75 area. The TW DXY Index slips over 99 levels to currently 98.15. EC currencies also extend yesterday’s rally, benefiting from a combination of continued EC support (interest rates and potential FX interventions), better regional/global risk sentiment and potential prospect for coordinated EU support. The forint, the Czech crown and the zloty strengthened to EUR/HUF 378, EUR/CZK 25.20 and EUR/PLN 4.80 respectively. The British Pound appreciates against the Dollar (1.3175), but weakens further against the Euro (EUR/GBP 0.8385) even if the markets again adopt the idea of ​​a more aggressive tightening of the BoE to deal with inflationary risks.

News headlines

Hungarian inflation in February accelerated by 1.1% m/m, faster than the expected 0.8% but slower than January’s 1.4%. Over the past month, food prices have increased by 2.1%, the Hungarian Central Statistical Office noted, although some sub-components have been cheaper M/M due to price caps imposed by the the government. Durable consumer goods were 0.7% more expensive, services 0.7%. General prices rose 8.3% YoY (8.1% expected) – the fastest since August 2007. Food jumped 11.3% YoY; fuel prices 18.7%. Service charges increased by 5.5% and durable consumer goods by 8.3%. The Hungarian forint strengthened today even if inflation in the future is bound to soar even more in the context of soaring commodity prices and the past depreciation of the forint. This decision was mainly motivated by strong risk taking. EUR/HUF declined from 387.8 to 378.4. The central bank will decide tomorrow on its one-week deposit rate, a tool intended to support the forint in times of stress. The consensus expects an increase to 6% from 5.35%.

Italian Bureau of Statistics noted the country’s economic growth is already affected by “the energy price shock relative to the baseline scenario”. The toll is estimated at 0.7% and follows a probable drop in family consumption. Italy also started the year smoothly on the industrial level. Production fell 3.4% more than expected in January, affected by the latest wave of pandemic restrictions.