US EARLY MORNING: Risk sentiment perks-up as EU to mull massive issuance to finance energy and security

EQUITIES: Asian stocks were mostly negative, following a red lead from Wall Street, where the Nasdaq Comp entered into a bear market, and the Dow fell into correction. The European day started mixed, but risk sentiment perked-up on reports that the EU was mulling a massive joint bond sale to finance defence and energy, and a plan could be announced this week. This also helped to inject risk-on bias into US equity index futures, which moved into positive territory (RTY +0.5%, ES+0.3%, YM +0.2%, NQ +0.2%). Analysts at Goldman Sachs note that volatility continues to edge higher (VIX has a 35-handle vs lows of around 20 in Feb) and said that equity options were pricing an elevated probability of another large sell-off in the next three-months. "Macro indicators remain above pre-COVID levels, setting a higher bar to enter into a high vol regime - our model still points to a relatively low probability of about 10% but of course macro conditions have worsened sharply," GS writes. The bank also notes that high volatility is not unusual during wars, and it does tend to ease back in the months that follow, but adds that "geopolitical risks are seldom comparable and current macro conditions matter - a continuation of the Russia/Ukraine conflict increases stagflationary risks," and "a larger growth slowdown, coupled with potential monetary tightening to fight off inflation, increases the risk of a sustained high vol regime."

TREASURIES: Yields are higher along the curve by between 6-10bps, with the underperformance mainly in the belly. The shape of the curve is mixed, with longer-dated spreads narrowing (growth concerns), but shorter dated spreads a touch steeper (inflation concerns). Yields picked-up in the European morning amid news the EU is mulling a “massive joint bond sale” to finance defence and energy spending, with details perhaps forthcoming this week. The impact of high oil prices on the curve were seen again on Monday as higher energy and commodity prices saw 10yr breakevens rise to a new record. Geopolitical developments have exacerbated post-pandemic price pressures, and amid the slower growth profile is leading to concerns about stagflation. This is a theme expressed by some ECB officials heading into this week’s meeting on Thursday (our preview is here). Thursday’s US CPI report will also be eyed in that frame ahead of next week’s FOMC. Elsewhere, the Treasury will sell new 3yr notes later today (history here).

ENERGY: Crude benchmarks are up by just under three bucks (WTI USD 122/bbl, Brent USD 126/bbl). Germany does not endorse banning imports of Russian oil and gas, but the EU bloc is still looking at longer term measures to reduce reliance on Russian energy, while the US is still reportedly moving towards a ban. Reuters reports that OPEC officials have met up with US shale producers at CERA Week, perhaps a sign that the cartel is looking to engage US producers as its own spare capacity remains thin, and as many are imposing voluntary embargoes on the purchase of Russian oil. With energy prices being dictated by the tenor of incoming geopolitical commentary, we are paying careful attention to remarks from key officials at the CERA week energy conference; today’s schedule can be accessed here, and includes OPEC Secretary General, Alberta region Premier (watch for Keystone comments – he has already told US officials it is not too late for Keystone), US State Department Global Energy Security Advisor (any commentary on Russian energy sector), Libya’s NOC officials (political developments has hit production of late), a host of key energy execs including Equinor and Aramco.

DOLLAR: The Dollar index has backed off highs, currently trading around neutral, but remains just beneath its highest levels since mid-2020, supported by geopolitics and the generally soft risk conditions seen this week. Activity currencies and commodity FX is being dragged on by stagflation concerns (higher energy prices weighs on growth, adds to inflationary pressure) along with higher volatility across asset classes - that dynamic has seen the AUD, NOK and BRL fall off recent highs, SocGen notes, while energy importers like TRY are suffering (more than one dynamic in play here, of course). Havens JPY and CHF are seeing some reprieve amid a more constructive risk tone in the European morning, though there are strong suggestions that the SNB has been in the market to ease the Swissy strength. For the EUR, some desks have cited oversold conditions, and along with a decent risk tone this morning after the European cash open, the single currency rises towards 1.09 again; “buyers are likely to stay on the side-lines though ahead of US CPI and the ECB meeting on Thursday,” SocGen says, “SNB intervention and risk/ commodity prices are the main drivers for selling or potential short covering gains in the next 48 hours.”

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08 Mar 2022 - 09:46- MetalsGeopolitical- Source: Newsquawk

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