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Futures Fade As Yields Soar, Oil Slides And China Stocks Crater

Tyler Durden's Photo
by Tyler Durden
Monday, Mar 14, 2022 - 12:15 PM

US equity futures held on to modest gains overnight as the market desperately clung on to hope that the latest ceasefire talks between Russia and Ukraine which started on Monday, may yield results (clearly forgetting how the rug was pulled from under the market on Friday in an identical setup), which initially sent stocks higher especially in Europe, despite a surge in 10Y TSY yields to 2.10%, the highest since July 2019, two days ahead of the first Fed rate hike, and a complete collapse in Chinese stocks. And while U.S. index futures were still pointing to a positive open around 8am ET this gain is fading fast, with spoos now up just 0.5% after rising 1% earlier...

... as headlines from the Kremlin suggested that a ceasefire is the last thing on Putin's mind.

  • *KREMLIN: RUSSIA WILL REALIZE ALL ITS PLANS IN UKRAINE OPERATION
  • *KREMLIN: UKRAINE OPERATION WILL BE COMPLETED ON SCHEDULE
  • *KREMLIN: RUSSIA DIDN'T REQUEST CHINA MILITARY AID FOR OPERATION *KREMLIN: RUSSIA HAS RESOURCES NEEDED TO COMPLETE UKRAINE ACTION

And while futures would normally be deep in the red by now, and will be shortly now that AAPL is at LOD...

  • APPLE FALLS TO SESSION LOW, DROPS 1.6% IN PREMARKET TRADING

... this morning algos are confused by the drop in oil which has emerged as an inverse barometer for peace, however the reason oil is down today is due to the unprecedented lockdown of China's Shenzhen, announced over the weekend, and which the market is worried may spread to the rest of the market and lead to another Chinese shutdown (spoiler alert: it won't, but it will cripple US-facing supply chains as the Russia-China alliance makes itself felt).

Meanwhile, and as previewed last night, in addition to the latest surge in covid cases and Shenzhen lockdown, Chinese stocks listed in Hong Kong had their worst day since the global financial crisis, as concerns over Beijing’s close relationship with Russia and renewed regulatory risks sparked panic selling. The Hang Seng index dropped more than 4%, sliding below 20,000 to the lowest level since 2015...

... while the Hang Seng China Enterprises Index closed down 7.2% on Monday, the biggest drop since November 2008.

The Hang Sang Tech Index tumbled 11% in its worst decline since the gauge was launched in July 2020, wiping out $2.1 trillion in value since a year-earlier peak, after the southern city of Shenzhen, a key tech hub near Hong Kong, was placed into lockdown to contain rising Covid-19 infections. The broader Hang Seng Index lost 5%.

“If the U.S. decides to impose sanctions on China in total or on individual Chinese companies doing business with Russia, that would be a concern,” said Mark Mobius, who set up Mobius Capital Partners after more than three decades at Franklin Templeton Investments. “The whole story is still up in the air in this case.”

In premarket trading, U.S.-listed Chinese stocks resumed a steep selloff on Monday, following an 18% rout last week, as concerns about Beijing’s close relationship with Russia added to losses spurred by a Chinese crackdown on tech giants and the growing risk of U.S. delistings. Alibaba (BABA US), JD.com (JD US) both fall 5%. U.S. casinos stocks are also lower in premarket, with multiple headwinds weighing on the sector, including inflation, while listed names with exposure to Macau face additional pressure from surging Covid cases in China’s Guangdong province and in Hong Kong. Wynn Resorts (WYNN US) -1.8%; Las Vegas Sands (LVS US) and MGM Resorts (MGM US) also down in thin trade. Meanwhile, Apple is down 1.6% after supplier Foxconn announced it was halting operations at its Shenzhen sites, one of which produces iPhones, in response to a government- imposed lockdown on the tech-hub city. Apple +0.2% in premarket.

Besides all the geopolitical chaos, this week’s main focus will be on the Fed’s policy meeting, with traders expecting a quarter percentage-point rate hike. “There is little a central bank can do about commodity prices -- Fed Chair Powell can hardly dig an oil well in the middle of Washington D.C.,” said Paul Donovan, chief economist at UBS Global Wealth Management. “The concern will be about second-round effects -- prices encouraging higher wage costs.”

In Europe, the Stoxx 600 was 1.7% higher with automakers and banks leading gains, while miners and energy stocks underperformed.  Tech investor Prosus falls as much as 11% in Amsterdam, the most since March 2020 and touching a record low, following a continued selloff in Chinese technology shares as concerns about Beijing’s close relationship with Russia added to worries over regulatory headwinds. Naspers, which holds a 29% stake in Chinese online giant Tencent through Prosus, slides as much as 15% in Johannesburg, the steepest plunge since November 2000. Here are some of the biggest European movers today:

  • VW preference shares jump as much as 8.7% in Frankfurt and are among the top performers in a buoyant Stoxx 600 Automobiles & Parts Index after the carmaker pre-released results late Friday. Stifel called it a strong fourth quarter and a “surprisingly confident” outlook.
  • Uniper gains as much as 11%; the power plant operator might benefit from the U.K. government’s potential plans to extend the life of coal-fired power plants, RBC says.
  • Telecom Italia shares rise as much as 9.7% after the firm agreed to a deeper review of KKR’s takeover proposal and said it will ask the private equity giant for more details about its business plan.
  • Phoenix Group shares rise as much as 3.7% after reporting full-year results, with Peel Hunt saying the insurer’s cash generation was “better than expected.”
  • Danone rises as much as 5.6% after Bernstein says the French yogurt maker “seems to be doing everything right” under new management. The brokerage raises its recommendation on Danone and downgrades Reckitt and Unilever.
  • Prosus shares fall as much as 11% in Amsterdam, the most since March 2020, following a continued selloff in Chinese technology shares as concerns about Beijing’s close relationship with Russia added to worries over regulatory headwinds
  • Sanofi slumps as much as 6.2% after the French drugmaker says its mid- stage trial for amcenestrant in breast cancer didn’t meet the primary endpoint.
  • Basic resources shares drop in Europe as commodity prices decline, underperforming the benchmark Stoxx Europe 600, which is gaining on Monday. Rio Tinto falls as much -4.2%, Glencore -4.5%, Anglo American -5.3% lead drop in the Stoxx Europe 600 basic resources sub-index.

As noted above, Asian stocks plunged, led by a record 11% plunge in Chinese tech shares as a lockdown in Shenzhen added to woes including Beijing’s crackdown on the sector and mounting concerns about the economic fallout from sanctions on Russia. The MSCI Asia Pacific Index dropped as much as 1.5% to reach a low last seen September 2020, with heavyweights Alibaba and Tencent diving 11% and 9.8%, respectively. The Hang Seng Tech Index plunged 11% after the southern city of Shenzhen, a key tech hub near Hong Kong, was placed into lockdown to contain rising Covid-19 infections. The broader Hang Seng Index lost 5%. “The latest coronavirus outbreak is raising uncertainties over the Chinese economic outlook while high commodity prices are a drag for the Chinese economy no less than for many other countries, limiting the room for monetary easing,” said Aw Hsi Lien, a strategist at Tokai Tokyo Research. “There’re rising perceptions that this year’s growth target of 5.5% is becoming difficult to achieve.”    Investors also remain on edge over risks for Chinese companies stemming from U.S. actions due to Russia’s invasion of Ukraine. Sentiment was also rattled late last week as U.S. regulators identified Chinese companies that could be kicked off exchanges if they fail to open their books to U.S. auditors. While the delisting risk has been known since last year, the Securities and Exchange Commission’s list served as a “wake up call,” said Willer Chen, an analyst at Forsyth Barr Asia Ltd. “I see no way to solve the dispute” between the U.S. and China under current policies, he said.  The historic sell-off in China also drove many peer Asian equity gauges into the red. Still, shares in resource-rich Australia gained and Japan’s Topix climbed amid expected benefits for exporters from the yen’s fall to a five-year low near 118 per dollar.

Japanese equities climbed, rebounding after last week’s losses, as a weaker yen bolstered the outlook for exporters and a decline in oil provided a respite amid recent inflation concerns. Auto makers and banks were the biggest boosts to the Topix, which gained 0.7%. Tokyo Electron and Advantest were the largest contributors to a 0.6% rise in the Nikkei 225. The yen approached 118 per dollar, extending its loss after weakening more than 2% last week.  The Nikkei 225 dropped 3.2% last week, its worst since November, while the Topix fell 2.5%. In addition to developments on Russia’s war in Ukraine, investors this week will be monitoring monetary-policy decisions from the Bank of Japan and Federal Reserve. “As Japan’s economy and wage growth are more subdued than in the U.S., and, thus, the BOJ will be slower to tighten than the Fed, the yen may well trend weaker, although any move beyond 120 would not be encouraged by officials,” Nikko Asset Management strategist John Vail wrote in a note.

In FX, the Bloomberg Dollar Spot Index inched inched lower and the greenback traded mixed against its Group-of-10 peers. European currencies, lead by the Swedish krona and Norwegian krone, were the best performers while the Australian and New Zealand dollars, as well as the yen, fell. Sweden’s krona rallied as much as 1.8% as sentiment improved and as economists expect the country’s central bank to make a policy U-turn later this year, after inflation reached a new 28-year high last month and as price increases are seen accelerating on the fallout from Russia’s invasion of Ukraine The pound was steady after falling to November 2020 lows on Friday, while gilts slumped. Focus this week will be on the Bank of England, which is expected to raise interest rates for a third time in a bid to control inflation. The yen fell to a five-year low against the dollar as traders boosted bets on the pace of the Federal Reserve’s rate hikes this year amid accelerating U.S. inflation and as risk reversals backed a less-favorable outlook for the Japanese currency. Australia’s dollar dropped for a second day as oil and iron ore lead commodity prices lower, while sliding Chinese equities weighed on risk sentiment.

In rates, as noted above, Treasuries sold off, led by the belly, following wider losses across bunds as core European rates aggressively bear-steepen. Treasuries and the 5-year Treasury yield topped 2% for the first time since May 2019 while the yield on 10-year Treasuries rose to 2.10%, the highest since July 2019, before easing back to 2.06%. The US front-end slightly outperforms, steepening 2s5s and 2s10s spreads by 1.7bp and 1.3bp. IG dollar issuance slate empty so far; volumes projected for the week are around $30b, following one of the busiest weeks on record

In commodities, WTI drifts ~5% lower to trade at around $103. Brent falls more than 4% to the $107 level. Spot gold falls roughly $27 to trade near $1,962/oz. Spot silver loses 2.6% near $25. Most base metals trade in the red; LME aluminum falls 3.6%, underperforming peers.

Bitcoin was initially subdued beneath USD 38,000 ahead of an EU vote on environmental sustainability standards measure that could lead to a ban on Bitcoin, but later recovered with support also seen following a tweet from Elon Musk. Elon Musk tweeted "I still own & won’t sell my Bitcoin, Ethereum or Doge fwiw". Japan demanded that cryptocurrency transactions be blocked if they are sanctions related.

Besidesall that, it is a quiet start to thge week with no macro news on today's calendar.

Market Snapshot

  • S&P 500 futures up 0.5% to 4,223.50
  • STOXX Europe 600 up 0.4% to 433.05
  • German 10Y yield little changed at 0.31%
  • Euro up 0.4% to $1.0952
  • MXAP down 1.4% to 168.91
  • MXAPJ down 2.1% to 549.22
  • Nikkei up 0.6% to 25,307.85
  • Topix up 0.7% to 1,812.28
  • Hang Seng Index down 5.0% to 19,531.66
  • Shanghai Composite down 2.6% to 3,223.53
  • Sensex up 1.2% to 56,207.96
  • Australia S&P/ASX 200 up 1.2% to 7,149.40
  • Kospi down 0.6% to 2,645.65
  • Brent Futures down 2.7% to $109.60/bbl
  • Gold spot down 0.8% to $1,971.65
  • U.S. Dollar Index down 0.21% to 98.92

Top Overnight News from Bloomberg

  • The U.S. and China plan to hold their first high-level, in- person talks since Moscow’s invasion on Monday. The meeting comes after China rejected accusations by U.S. officials that Russia had asked it for military equipment to support the invasion of Ukraine
  • Chinese stocks listed in Hong Kong had their worst day since the global financial crisis, as concerns over Beijing’s close relationship with Russia and renewed regulatory risks sparked panic selling
  • Global bond markets are flirting with a 10% drawdown for the first time in over a decade as surging inflation forces yields higher. The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt, has fallen about 9.9% from a high in early 2021, the biggest decline from a peak since 2008, the data show
  • Already pivoting to tightening monetary policy amid the fastest consumer price gains in four decades, Fed Chair Jerome Powell and colleagues now have to deal with the economic fallout of the war, which threatens to deliver the twin blows of weaker growth and even-quicker inflation
  • ECB Governing Council member Martins Kazaks says “it’s very possible that the bond-buying program will end in the third quarter”
  • Germany’s coronavirus infection rate hit a record for the third straight day on Monday, with the renewed surge prompting the country’s top health official to issue a grim warning
  • Leveraged fund net short aggregate Treasuries bets across the curve have hit the highest in over a year, the latest CFTC data show. The U.S. Treasury market just endured one of its worst weeks of the past decade, with yields propelling toward their highest levels of the past year thanks to worsening inflation and the imminent expected shift in policy
  • The yen’s plunge to a five-year low shows no signs of easing as surging commodity prices have worsened the outlook for Japan’s trade balance and put pressure on the currency’s haven credentials. The nation is a net importer of a long list of raw materials from crude oil and grains to metals, exposing it to higher costs as prices of all these have risen due to sanctions imposed on Russia over its invasion of Ukraine
  • Russia has already lost access to almost half of its reserves and sees more risks to President Vladimir Putin’s war chest due to increased pressure from the West on China, said Finance Minister Anton Siluanov
  • Nickel’s 250% price spike in little more than 24 hours plunged the industry into chaos, triggering billions of dollars in losses for traders who bet the wrong way and leading the London Metal Exchange to suspend trading for the first time in three decades. It marked the first major market failure since Russia’s invasion of Ukraine jolted global markets, showing how the removal of one of the world’s largest exporters of resources from the financial system in the space of weeks is having ripple effects across the world

A more detailed look at global markets courtesy of newsquawk

Asia-Pacific stocks were somewhat mixed as participants digested varied geopolitical headlines ahead of key risk events. ASX 200 was underpinned by strength in its largest-weighted financial sector and encouragement from M&A related headlines. Nikkei 225 benefitted from further currency weakness but failed to hold above the 25,500 level. Hang Seng and Shanghai Comp. were pressured amid several headwinds, including COVID-19 concerns with the technology hub of Shenzhen under a one-week lockdown, which pressured tech and weighed on Macau casino names, as well as dragged the Hong Kong benchmark beneath the 20K level for the first time since 2016

Top Asian News

  • Developers Sink After Weak Home Mortgage Data: Evergrande Update
  • Marcos Keeps Big Lead in Philippine Presidential Survey
  • Funds Managing $130 Trillion Target Lobbying in Climate Plan
  • Hang Seng China Stock Gauge Sinks 7.2%, Most Since Nov. 2008
  • China Locks Down Shenzhen, Entire Jilin Province as Covid Swells

European bourses are firmer, Euro Stoxx 50 +2.1%, following a mixed APAC handover amid conflicting headlines as we await details of the latest Ukrainian-Russia talks. Stateside, US futures are firmer across the board but with magnitudes more contained, ES +0.9%, ahead of multiple risk events. Sectors in Europe are mostly firmer though some of the more defensive names are lagging modestly, Autos outperform post-Volkswagen

Top European News

  • European Gas Slumps as Russia, Ukraine to Hold Further Talks
  • British Airways-Operator Comair Still Grounded in South Africa
  • Funds Managing $130 Trillion Target Lobbying in Climate Plan
  • ECB’s Kazaks: ‘Very Possible’ Net Bond-Buying Will End in 3Q
  • U.S.-Listed Chinese Stocks Sink Again as China-Russia Ties Weigh

In FX, Aussie bears the brunt of reversal in commodity prices; AUD/USD hovering around 0.7250 ahead of RBA minutes tomorrow. Yen extends decline on yield and BoJ policy divergence towards 118.00 vs the Dollar. Euro rebounds with risk appetite amidst hopes of constructive Russian-Ukrainian dialogue; EUR/USD finds support around 1.0900 where 1.84bln option expiries reside to trade above 1.0960. Rouble firmer on the premise that positive words will speak louder than negative actions. Yuan depreciates as Covid cases mount in China and PBoC sets a weaker than expected onshore midpoint rate, USD/CNH probes 6.3800 at one stage. Swedish Crown strong in line with latest inflation data and hawkish Riksbank rate calls from Nordea and SEB, EUR/SEK tests Fib support circa 10.5252

In commodities, WTI and Brent continue to unwind geopolitical premia amid mixed Russia-Ukraine developments and the possibility of progress soon. Currently, benchmarks lie near fresh lows of USD 103.42/bbl and USD 107.59/bbl respectively, further impeded by IEA's Birol. Iraq set April Basrah medium OSP to Asia at Oman/Dubai + USD 3.50/bbl, OSP to Europe at Dated Brent - USD 3.05/bbl and OSP to North and South America. UK PM Johnson is seeking a mega oil deal with the Saudis and is pushing for solar and nuclear energy to cut reliance on foreign oil, while the UK is also considering keeping some coal-fired power stations operational, according to Express and The Times. IEA Chief Birol says responsible producers should increase oil output. French PM Castex said the government will offer EUR 0.15/litre rebate on petrol prices from April to counter high prices with the rebate on fuel to last four months and is expected to cost around EUR 2bln. Japanese PM Kishida will look at measures for high oil prices and raw material food prices whilst watching the situation carefully, according to the Japanese ruling party secretary general; subsequently, Japanese government is to increase the petrol subsidy to around JPY 24/litre and close to the ceiling of JPY 25/litre. Gazprom says it is continuing shipping gas to Europe via Ukraine, Monday's volume is broadly unchanged at 109.5mln cubic metres; does not intend holding spot gas sale sessions on its electronic sales platform this week. China is planning to boost its coal output by as much as it imports. Spot gold and silver are pressured unwinding safe-haven appeal in-fitting with other typical havens

In Fixed income, the debt rout rages on on as futures take out near term technical supports and yields reach or breach psychological
levels. Curves continue to steepen on resurgent risk sentiment rather than any read respite from sharp retracement in crude prices.
USTs and Gilts anticipating tightening from the Fed and BoE later this week.

US Event Calendar

  • Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

I've tried to keep the introductory paragraphs fairly sober in recent weeks as the challenging time for the world doesn't really need my flippancy. However I have to share with you this morning that 5 minutes before I started typing this I started walking again for the first time in 6 weeks. The crutches were left by the bed and my morning coffee made without hopping between the cupboard, the sink and the fridge, and then working out how to get my coffee back upstairs while on crutches. It's amazing how good normality felt. Fingers crossed this operation will buy me a few years before knee replacement. We will see.

The newsflow didn't look good late on Friday as some earlier positive signs on the conflict talks petered out. In terms of developments there was mixed news last night though as on the positive side some progress seemed to be made on talks, but on the negative side the FT reported that US officials suggested that Russia have asked China for military and economic assistance since the invasion began. The article said that the officials didn't details China's response but this came just few hours after White House officials announced that a high-level delegation from the US would meet with a top Chinese official in Rome today.

On the positive side however, Ukrainian negotiator and presidential adviser Mykhailo Podolyak tweeted and posted a video online saying, "Russia is already beginning to talk constructively... ... I think that we will achieve some results literally in a matter of days,". A Russian delegate echoed the sentiment and US Deputy Secretary of State Wendy Sherman also highlighted that Russia was showing signs of willingness to engage in substantive negotiations.

DM equity futures are making modest gains in Asia with contracts on the S&P 500 (+0.59%), Nasdaq (+0.35% and DAX (+0.59%) all trading higher. US Treasuries are seeing a pretty big move for an Asian session with the 5-yr yield (+6.3bps) moving above 2% for the first time since May 2019 whilst the 10-yr yield is up +5.3bps to 2.044%. Elsewhere Brent futures (-1.93%) are down to $110.50/bbl while WTI futures (-2.41%) are at $106.70/bbl.

Asian equity markets are mostly trading lower though as we start the week following the broadly negative cues from Wall Street on Friday. The Hang Seng (-3.81%) is leading losses across the region with Chinese tech stocks again seeing major declines. Shares in mainland China are also weak with the Shanghai Composite (-1.30%) and CSI (-1.73%) both in negative territory after the southern Chinese tech hub Shenzhen was put under a citywide lockdown over the weekend to slow an outbreak of Covid-19. Elsewhere, the Kospi (-0.72%) is down but the Nikkei (+0.95%) is trading up this morning, reversing its previous session's losses.

Coming back to the Covid news, the Chinese authorities have placed 17.5 million residents of Shenzhen under lockdown after the city reported 66 fresh Covid cases on Sunday while the nationwide official figure nearly doubled to 3,400. The lockdown and suspension of public transport will last until March 20 and will be accompanied by three rounds of mass testing of residents. At the same time, the surge in cases across China has also prompted the authorities to shut schools for students from kindergarten through middle schools next week in Shanghai. In the neighbouring Hong Kong, the health authorities reported 32,430 new Covid-cases on Sunday with city leader Carrie Lam highlighting that the outbreak has not past its peak yet despite recent number of daily cases “slightly levelling off”.

Looking forward now, and as we all know it's a big central bank week with the Fed the obvious focal point mid-week. The BoE and the BoJ also hold meetings, along with some of their emerging markets counterparts. We'll also see CPI for Japan and Canada and a number of housing market statistics in the US and China. Earnings will include Volkswagen, FedEx and Enel, among others.

Wednesday will also be a landmark day even outside of the Fed as this is the date that two Russian Eurobonds have coupon payments. These are small (c.$120bn out of c.$1.75bn of annual hard currency coupons) but will be hugely symbolic. Speaking to one of our EM strategists, Christian Wietoska, and one of our European economists, Peter Sidorov, over the weekend their view was that this would likely mark the start of the 30-day grace period that issuers have before a default is officially triggered. 30-days still gives time for there to be a negotiated end to the war and therefore this probably isn't yet the moment where we see where the full stresses in the financial system might reside. There has already been a huge mark to market loss already anyway with news coming through or write downs. However this is clearly an important story to watch.

Onto the Fed now and the FOMC concludes on Wednesday, with the Fed expected to raise rates for the first time since December 2018. Markets are pricing in a +25bps hike, in line with the rhetoric from Chair Powell at his congressional testimonies a couple of weeks back. Before the invasion we thought a 50bps was likely this week and the problem is that by delaying such a move they may have to do more later. The market seems to agree to some degree as at Friday's close the market was pricing in 6.7 hikes this year, the most seen in this cycle and above the post invasion intra-day lows of 4.45. This morning we are at 6.92.

A full preview from our US economists is available here. With regards to QT, they anticipate that the Fed will use this upcoming meeting to announce caps determining the maximum monthly runoff and, in May, announce QT that would begin in June. They think we will see $800bn of runoff this year and an additional $1.1tn drawdown in 2023, a cumulative reduction we think is roughly equal to between three and four rate increases (see "QT update: The sooner the better"). The fascinating thing for me is what this does to the yield curve if they are correct. For me nirvana for the Fed is getting to around neutral, somewhere with a 2 handle on Fed Funds and trying to ensure that 10yr yields rise enough to prevent inversion but not enough to lead to a tightening of financial conditions. So if in 12-18 months time 2 year yields are 2.25-2.5%, 10 year yields are 2.75-3% and inflation is coming back towards trend then the Fed have pulled off a masterstroke. If however, 2yr yields are above 2% and 10yr yields below this level, the inversion will likely bite. On the other hand, if the curve steepens up too much and longer end yields are notably above 3% the risk is that financial conditions tighten too much given the global debt load. So the Fed are trying to thread a needle and its possible inflation will give them an impossible task. Time will tell.

Ahead of the Fed watch out for US PPI (Tuesday) and Retail Sales (Wednesday). They are highly unlikely to change the equation for this FOMC but will be important for the direction of the economy and inflation thereafter. We also get a plethora of US housing data to end the week with Thursday's housing starts and Friday's existing homes sales. These are going to be important for both activity and the rents component in CPI.

Back to central banks and on Thursday, it will be the BoE's turn. Our UK economist previews the meeting here, and is expecting a +25bps hike to 0.75%, the pre-pandemic level. Their projected terminal rate is 1.75%.

Finally, on Friday, the Bank of Japan will hold a meeting as well and a preview can be found here. The central bank is expected to hold the key rate steady but there is a chance of economic assessment being downgraded. The Bank of Russia's decision on the same day will be scrutinised for the response to risks to the economy from the ongoing geopolitical turmoil.

Back to the week that was now. The war in Ukraine raged on, while negotiations continued to generate little tangible progress as leaders managed expectations down for any near-term resolution. However, there were various green shoots throughout the week when it appeared both Ukrainian and Russian officials left some room for compromise from their original positions.

The glimmers of hope on the war front, along with a more hawkish-than-expected ECB sent sovereign bond yields higher on both sides of the Atlantic this week. Positive news about the supply of oil and gas sent futures lower on the week, despite the US and UK moving to restrict Russian imports.

Oil and European natural gas prices fell -5.07% (+3.05% Friday) and -30.15% (+3.82% Friday) over the week, following a proclamation from President Putin that Russia would honor its energy export commitments, instead of unilaterally cutting off supply in retaliation to sanctions. For its part, the Iraqi oil minister noted OPEC would increase oil production were supply to reach scarcity levels.

The other major story on the week was the ECB meeting, where the central bank signaled more focus on price stability than the potential downside impact to growth from the war. The governing council announced an accelerated tapering of its APP purchases, which would end in Q3, maintaining the option for increases to their policy benchmark rate sometime thereafter should the data merit. The ECB also updated their forecast for 2022 inflation to 5.1 percent and 2.1 percent for 2023.

The tighter than expected policy stance gave rise to higher sovereign bond yields on both sides of the Atlantic, with 10yr bunds, OATs, gilts, and Treasuries rising +31.8bps (-2.5bps Friday), +28.9bps (-2.6bps Friday), +28.3bps (-3.2xbps Friday), and +26.1bps (+0.5bps Friday), respectively. For 10yr bunds that was the largest weekly gain since June 2015, 10yr gilts the largest weekly gain since September 2017, September 2019 for Treasuries, and March 2020 for OATs. Money markets ended the week pricing +40.5bps of ECB tightening this year, up from +24.1bps of tightening at last week’s close.

European equities latched on to this week’s marginally more optimistic news, with the STOXX 600 finishing +2.23% (+0.95% Friday), the first weekly gain in a month. The DAX and CAC also finished the week +4.07% (+1.38% Friday) and +3.28% (+0.85% Friday) higher, respectively. US investors proved more pessimistic, with the S&P 500 retreating -2.88% (-1.30% Friday), with tech underperforming again, as the NASDAQ fell -3.53% (-2.18% Friday). The US indices took a leg lower Friday afternoon after Europe called it a week when Ukrainian leadership didn’t strike as optimistic a tone as Russian leaders surrounding the prospects of negotiations, as well as reports that Belarussian troops were about to join the invasion of Ukraine.

University of Michigan consumer inflation expectations for the next year increased to 5.4 percent, above expectations of 5.1 percent on Friday. This followed the February US CPI data which showed headline and core measures increasing to their highest readings in four decades, which would have headlined just about any other week. In line with this, market-based measures of inflation expectations increased, with 10yr Treasury breakevens widening +27.3bps on the week.

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