Sharp re-pricing in bond markets yesterday

Market movers today

Another quiet day in terms of economic data releases. This morning, we will get business confidence indicators from Norway, Denmark and France.

The US jobless claims data are quite important, as we get an indication of whether the US labour market has taken a hit from what has happened to the world economy over the past two months.

We also receive final euro area HICP inflation data.

Tonight the Bank of England Governor Andrew Bailey, ECB President Christine Lagarde and Federal Reserve Chairman Jerome Powell will be speaking.

The 60 second overview

Market sentiment remains volatile. Risk markets caught between recession concerns, speculations regarding 'peak inflation', disappointing growth in China, and the tail risk of an escalation of the war in Ukraine. In the anticipation of aggressive Fed tightening, the US 10-year real yield briefly visited positive territory on Wednesday. Same time, the 'peak inflation' debate seems to be intensifying, and rates markets underwent sharp repricing on Wednesday with long bond yields falling.

Russia-Ukraine: The battle over the besieged South-eastern capital of Mariupol continues after Ukraine refused to surrender by yesterday's deadline. A top ally of President Putin said Russian army would seize the last stronghold of Ukrainian resistance in the city, the Azovstal steel plant, on Thursday. Around 1,000 civilians have been told to keep shelter in the premises and efforts to evacuate have largely failed. Securing control over Mariupol would mark a key victory for Russia after it has shifted the focus of its military operations to the East and South of Ukraine. Taking over Mariupol would enable a land bridge for Russia from the Donbass region to Crimea. Ukraine has said they are ready for a 'special round of negotiations' to protect civilians in Mariupol. Meanwhile, yesterday, Russia test-launched a new nuclear-capable intercontinental ballistic missile, which according to Putin would make Russia's enemies 'stop and think' (see Reuters).

Global food crisis: The World Bank President, David Malpass, warned yesterday that the food crisis triggered by Russia's invasion on Ukraine is causing a 'human catastrophe' (see BBC). He said food prices could increase by 37% and that impacts will be magnified for the world's poor who will struggle to make ends meet. According to a UN food price index, food prices are at their highest since the records began 60 years ago. Mr. Malpass also warned of a looming debt crisis in developing markets on the back of pandemic-induced increases in overall debt levels and a slow and uneven economic recovery. Some developing countries will eventually need a debt restructuring but coordination on debt relief has become ever more cumbersome as a result from a more fragmented debtor base.

Equities: Equities were mostly higher, but in a choppy US session. Defensives beat cyclicals, and value outperformed growth although yields ticked lower. Lately, the moves in yields have not resulted in the usual equity response, being outperformance of banks and value cyclicals vs growth/defensives/quality. In fact, it has resulted in the opposite: Tuesday saw higher yields and growth outperforming. Yesterday saw lower yields (especially in Europe) and banks outperforming. A reason behind this disconnect is that yields are not been rising due to macro, but monetary policy repricing and stagflation fears. Dow closed 0.7% and Russell 2000 0.4% but S&P 500 -0.1%and Nasdaq -1.2%.

FI: Russia is edging closer to a default on its foreign debt after Credit Derivatives Determination committee stated that the payment in Rubles on April 4 on two USD-denominated bonds was a potential default and that Russia had until May 4 to pay investors in USD in order to avoid default. The estimate for total outstanding amount of credit default swaps on Russia is estimated to be USD 40bn (compared to an estimate of USD 8bn on Lehman back in 2008).

Yesterday, global bond yields declined significantly after having reached multi-year highs in US and Germany. The curves flattened from the long end as 30Y US Treasury yields fell some 13bp, while 10Y Treasuries fell 12bp. Part of this move was driven by the solid 20Y US Treasury bond auction where the bid-to-cover was the highest since the re-introduction of the 20Y benchmark back in 2020.

FX: EUR/SEK continued to move lower yesterday and the cross is now trading in 10.24 after Stefan Ingves' interview in the Swedish newspaper Dagens Industri. USD/CNY has moved significantly higher, partly explained by rising US yields. Elevated oil volatility has not spilled-over to oil-FX to the same extent.

Credit: Mirroring the more positive sentiment, credit markets went along with tightening in CDS indices on Wednesday. iTraxx Main closed the day 1.8bp lower at 78.1bp, while Xover was 8.7bp lower at 371.8bp.

Nordic macro

The Finnish Parliament started its debate on applying a NATO membership yesterday. Overall, it is starting to look quite certain Finland will apply for a membership in near future as most MPs are now in favour of applying. After the parliamentary debate, discussions will continue in parliamentary committees, which is expected to take some weeks. The final decision to apply will be made by the President and the Prime Minister both of whom are yet to reveal their exact thoughts on the matter (their support is likely though). The decision is expected in spring. Officially, if Finland decided to pursue a NATO membership, the Finnish heads of government should express their willingness to join, and thereafter, NATO would (most likely) invite Finland to join. Broad-based parliamentary support on the matter remains important since the treaty on accession eventually needs to be ratified in the Finnish parliament.