EUR/USD Unaffected by Rising European Rates and Election

Market movers today

This morning, the UK jobs report is due out. We are in particular interested in the number of paidrolled employees for March, which covers the period after the Russian invasion. Based on the US jobs report, which was decent, we do not expect a major impact on the UK labor market despite elevated geopolitical uncertainty and rising commodity prices. It is, however, important to keep in mind that labor market indicators are lagging activity indicators.

We also receive the German ZEW survey for April. ZEW declined significantly in March due to the Russian invasion and consensus expects another decline. Uncertainty is still high but a decline in VIX and a small rebound in stock markets pull in the other direction.

Today’s most important data release is the US CPI inflation print due out 14:30 CEST. Inflation likely rose to above 8% due to mainly a jump in commodity prices but we also expect core inflation rose further. This puts a lot of pressure on the Fed to tighten monetary policy more rapidly (front-loading rate hikes).

Also keep an eye on the US NFIB Small Business survey due out 12:00 CET, which includes a lot of interesting data on labor demand, wage compensation plans and whether businesses still expect to hike prices in coming months.

The 60 second overview

European yields going up: European rates gradually grinded higher through the day, with 10Y German yields touching 0.82%, which is the highest since 2015. French bonds was the main performer after Sunday’s first round presidential election as OATs-Bund spreads tightened some 5.5bp. Rising interest rates continue to see momentum with no particular circuit breaker. We doubt Thursday’s ECB meeting could provide such a circuit breaker as inflation will continue to run high for the coming months and hence spill-over from the US or faltering growth expectations is where we believe we should look for any such trigger.

Rally in EUR/USD flat: The initial rally we saw on opening of EUR/USD trading on Sunday (during Asian hours) was faded during Monday’s trading. The French election was likely the key source of the rally but we view the election as having a generally very small effect on EUR/USD spot. Hence, the fade was likely in part due to 1) the rally happened during illiquid hours of trading and 2) there continues to be downwards pressure on EUR/USD spot from which (1) likely provided speculators with an entry to short further. We continue to forecast 1.05 in 12M.

Equity: Global equities lower yesterday as the stagflation trade continued, yesterday with the stagnation part as the dominating force. Both the US and European session ending close to day low and futures are lower on both side of the Atlantic this morning. Defensive value outperforming with banks doing better than one could expect in a stagnating environment. However, this is in line with our argumentation that value should outperform quality currently despite pundits arguing for quality to be the best factor in a staflationary environment. With yields and not least real yields moving sharply higher it will hurt growth stocks and it’s very hard to make a quality basket without getting growth stock on board as well. Value has outperformed quality by more than 10% year to data but valuation suggests there is more to come. Uncertainty moved higher yesterday with VIX north of 24.

In US Dow -1.2%, S&P 500 -1.7%, Nasdaq -2.2% and Russell 2000 -0.7%. Asian markets are in red this morning but not driven by China news but instead the global risk off sentiment spilling into Asia as well

FI: European rates gradually grinded higher through the day.

FX: Alongside RUB, NOK was yesterday’s underperformer with EUR/NOK moving back towards 9.60. EUR/SEK also edged higher and broke solidly through the 9.30 threshold. EUR/USD erased the initial gains close to 1.0950 and ended the session back below the 1.09 figure. EUR/GBP mirrored EUR/USD price action.

Credit: Mirroring the overall soft sentiment, credit markets continued to see widening in CDS indices on Monday. iTraxx Main closed the day 1bp wider at 78bp, while iTraxx Xover was 4bp wider at 376bp.

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