Geopolitical tensions spike amid Russia-Ukraine escalation

In focus today

Today, in euro area we receive ECB's indicator of negotiated wage growth in the third quarter. The indicator declined significantly in Q2 to 3.5% y/y from 4.8% y/y, and we expect a rebound in Q3 as the decline in the second quarter was due seasonality of the payments especially in Germany. Hence, we do not put too much weight on the expected increase as most recent wage negotiations for the next year point to significantly lower wage growth going forward, which is the most important for the ECB.

We have several central bank speeches from both ECB and Federal Reserve during the day, where the market will look for clues on monetary policy.

There is significant focus on Nvidia as they are publishing earnings announcement today. A strong result is expected to support the equity markets.

Economic and market news

What happened over night

In China, Loan Prime Rates were as expected kept unchanged with 1Y 3.1% and 5Y at 3.6%. Part of the reason is the recent sharp depreciation pressure on the CNY which will likely keep PBOC sidelined for now on rates to not add to the downward pressure on the currency. Last week they again set the daily USD/CNY fixing stronger than the spot rate, indicating efforts to slow the depreciation.

What happened yesterday

In the euro area, October inflation was reported at 2.0% y/y (0.3% m/m). Core inflation was confirmed at 2.7% y/y despise service inflation being revised slightly up to 4.0% from 3.9%. The domestic inflation measure (LIMI) held steady at 4.2%, indicating persistent price pressure. However, the momentum declined again signalling a continued downward trend, which we expect will continue as wage growth declines. Overall, the downward trend in underlying inflationary pressures remains on track, which allows the ECB to continue lowering rates.  

In Germany, negotiated wages surged significantly to 8.8% y/y in Q3 from 3.1% y/y in Q2. Even excluding special payments, wages rose 5.6%, indicating substantial increases. For the ECB, the most important is the wage growth outlook and as such the previous developments. The German Bundesbank anticipates future wage negotiations to moderate due to economic weakness and lower inflation. However, current high wage growth suggests that services inflation might remain sticky in the short term, influencing ECB's policy decisions amid uncertainties about the pace of wage growth slowdown.

In Russia-Ukraine, Ukraine hit a military target inside Russia using long-range US-made missiles, marking the first use since restrictions were lifted. As a response, Russia lowered threshold for a nuclear strike. The market reacted to the resurgence of geopolitical tensions, by a decline in European stocks and the euro as investors rushed to safe-haven assets such as government bonds and gold.

Equities: Global equities were higher yesterday, although this was not a day of uniform global performance. Europe, and particularly Eastern Europe, underperformed due to escalating geopolitical tensions and the Ukraine-Russia war. Examining the sector rotation reveals significant differences across the Atlantic; cyclicals underperformed in Europe while outperforming in the US. It is important to note that we did not receive any significant macroeconomic data yesterday. Thus, the explanation for market movements appears to lie in the weaponised escalation. In the US yesterday, the Dow closed down 0.3%, the S&P 500 was up 0.4%, the Nasdaq rose by 1.0%, and the Russell 2000 increased by 0.8%. Most markets in Asia are in the red this morning, while both European and US futures are trending higher.

FI: The rising tensions between Russia, Ukraine and NATO provided some tailwinds to the EGB market yesterday with the 10Y Bund yield declining almost 11p before noon. However, most of the move faded through the second half of the session as Russian foreign minister Lavrov tried to dampen fears of a nuclear escalation. The Bund ASW-spread rose by 4bp throughout the day - the largest 1D move since June - with the level now back in positive territory (1.7bp).

FX: It was a steady day for the global FX market yesterday with little big news to drive the market and mixed risk sentiment. G10 currencies posted small gains versus the USD with commodity currencies, NZD, AUD, CAD and NOK once again leading the way. EUR/USD traded in a tight range below 1.06, EUR/SEK around 11.60 and EUR/NOK dropped towards 11.60.