US house passes military aid bill to Ukraine, Israel and Taiwan

In focus today

In a relatively quiet start to the week economic data-wise, markets will continue to closely monitor developments in the Middle East. Reports still suggest that Israel's retaliatory attack on Iran on Friday was relatively limited in size and force which alongside Iran's lack of response over the weekend could indicate a de-escalation of the conflict. This has also set the tone in the market opening this morning with price action generally reflecting relief.

In the euro area, focus is on consumer confidence for April today. Consumer confidence has remained stuck at low levels for the past months despite solid fundamentals for household finances. Private consumption has likely remained weak for this reason so an increase in consumer confidence could be a trigger for stronger consumption and thus growth.

Tuesday and Wednesday we look out for business sentiment surveys PMIs from the euro area and Ifo from Germany. Thursday, we receive first estimate of the Q1 GDP from the US. On Friday the Fed's preferred inflation measure PCE is released. Also Friday we get the Tokyo CPI excl. fresh foods for April. We expect the Bank of Japan to keep rates at the current level when they announce their rate decision the night before Friday. We expect the Hungarian Central Bank to announce a 50 bp cut to interest rates on Tuesday.

Economic and market news

What happened over night

In China, the loan prime rates were left unchanged as expected by markets. Chinese rates are on hold for now due to the pressure on the currency and the hawkish signals from the Fed.

What happened over the weekend

In the US, the house of representatives passed a 95 billion USD legislative package providing security assistance to Ukraine, Israel and Taiwan on Saturday. The Senate, controlled by the Democrats, is expected to vote on the bill Tuesday. They are expected to pass it, since they passed a similar measure over two months ago, which the house speaker Mike Johnson denied letting come to a vote in the House, which he finally did on Saturday.

Fed's Golsbee generally considered a dove said progress on inflation has stalled. It merits a pause to allow incoming data to provide more insight into how the economy evolves, he said.

The Oil market quickly calmed down again last Friday. The market was briefly alarmed by the news of Israel's retaliatory bombings in Iran, sending oil prices above USD90/bbl, but it ended the day around USD88/bbl.

Over the weekend, the US Congress passed new sanctions against the Iranian oil industry. Iran's oil production has increased by 600-700kbl per day over the year. If that oil disappears from the market, others will have to replace it, for example, Saudi Arabia, the US will have to sell from its strategic reserves, or the oil price will rise. Initially, we anticipate that the market will take a wait-and-see approach regarding the effect of the new sanctions. The US will likely tread carefully, given that a sharp rise in oil prices would probably be unpopular among voters ahead of the presidential election in November.

In Europe, ECB's Nagel said that the monetary policy needs to remain restrictive even after the first rate cut, and that it is too early to begin to discuss a rate path beyond the June meeting. We see a first rate cut coming in June as close to a done deal.

Equities: Global equities sold off on Friday as investors fled from tech stocks. Global tech lost more than 3% on Friday, while 5 out of 10 sectors managed to book gains, including financials. It is rare to see such a sharp sector rotation where financials, defensive, and small caps are outperforming simultaneously. The S&P 500 dropped 0.9% on Friday, while banks and insurance were the two best-performing industries despite yields ending marginally lower. The S&P 500 equal-weight outperformed MAG 7 by more than 1%, and defensives outperformed cyclicals by 2%. This just illustrates it was not a geopolitical or macro related, but a micro story where investors are questioning tech and AI-related earnings outlook after being disappointed by ASML and Taiwan Semiconductor. In the US on Friday, the Dow was up 0.6%, the S&P 500 was down 0.9%, the Nasdaq was down 2.1%, and the Russell 2000 was up 0.2%.

FI: There are not that many tier-1 economic data or events this week and the focus will still be on the Middle East. 10Y US Treasury yields have stabilised around the 4.6% together with 2Y UST trading around 5%. The key question is whether the market will continue to reprice the Federal Reserve. Previously, there has been good value in buying 2Y Treasuries around 5% given that we do not expect the Federal Reserve to hike rates. We still believe that the 5% level in 2Y and 4.75% in 10Y offer decent value for investors. The Bund ASW-spread has been testing the 35bp-level given the geopolitical uncertainty but has stabilised around 34-35bp level for now. We still expect it to move back to 30bp when the geopolitical uncertainty dampens.

FX: Friday's session was initially characterized by a strong USD and weaker Scandies, however this reversed towards the close and both SEK and NOK ended the day as outperformers within G10, defying the global equity sell-off. At the other end of the spectra, we found GBP following dovish remarks from previous BoE's Ramsden. USD/JPY looks set to start the week trading above 154.