• The German IFO business climate index brought a message similar to last Friday’s EMU PMI’s. Sentiment in Europe’s biggest economy has clouded over considerably, Ifo reported. The overall index dropped from 91.5 to 88.5. In particular, companies turned markedly more pessimistic on expectations (83.6 from 88.3) but current assessment was also softer than last month (93.7 from 94.8). Ifo explicitly mentions that ‘weakness in the manufacturing sector is steering the German economy into turbulent waters’. Many companies in the sector rate their order backlogs as being too low. However, subindices for services, trade and construction also printed at a lower level compared to last month. The Ifo release, together with a fragile risk sentiment, helped bonds to extend Friday’s, even as the move slowed after USD traders joined. German yields currently are ceding between 1.5 bps and 3.5 bps with the belly of the curve (5 &10’s) again outperforming. US yields on Friday were less affected as US PMI’s showed more resilient compared to Europe. Today, US and European interest rate markets again trade more or less in line with US yields declining from 1 bp (2-y) to 3.0 bps (5-y). Markets apparently fear that central bankers’ determination to eradicate (core) inflation will make it more difficult to engineer the hoped for soft landing, both in the US and in Europe. This evening, ECB’s Lagarde opens the ECB Forum on monetary policy in Sintra. The US Treasury later today also will sell $42 bln of 2-year notes.
European equity indices initially declined 0.5%/0.75%, but selling pressure gradually eased. The Eurostoxx 50 currently even reversed initial losses (+0.3%). The S&P 500 opens little changed. Investors are still pondering the consequences of the turmoil in Russia this weekend, but apparently didn’t draw any firm conclusions yet. The Dutch reference gas contract this morning temporarily jumped about 10 % higher but currently again trades little changed near €33/MWh. Oil also shows no clear directional trend (Brent $74.4 p/b). Golds gains modestly trading at $1930 p/oz.
• FX markets show a mixed, slightly inconclusive picture. The dollar again doesn’t profit from geopolitical and/or economic uncertainty. DXY dropped back to the 102,65 area. EUR/USD, despite fragile EMU data regains the 1.09 barrier (1.0915). The yen (USD/JPY 143,45, EUR/JPY 156.55) is holding within reach of the lows registered end last week. EUR/GBP again follows the broader EUR/USD move, rebounding to the 0.8590 area, compared to a pre-BoE correction low at 0.8518 touched last week. Despite uncertainty on Russia, CE currencies continue to perform well with especially the Czech koruna (EUR/CZK 23.65) and the forint (EUR/HUF 369) showing decent buying interest.
News & Views
• The Financial Times reported that the German audit office, the Bundesrechnungshof, said that possible Bundesbank losses are substantial and could necessitate a recapitalization of the German central bank with budgetary funds. “Depending on the extent and probability, the risks arising from monetary policy could, in the worst case, endanger the budgetary autonomy of the German Bundestag”. In its annual report earlier this, the Bundesbank announced a €1bn hit from its bond holdings, warning that future losses will likely exceed its remaining €19.2bn of provisions and €2.5bn capital. The rising interest rate environment causes losses on bond portfolios accumulated over the past decade via asset purchase programmes (monetary policy). The Bundesbank already stopped paying dividends to government. Other European national banks, including the NBB, are facing similar problems.
• The Turkish lira reached another all-time low today (EUR/TRY > 28) after the central bank (CBRT) this weekend announced another step to a more conventional monetary policy. It reduced the security maintenance ratio for banks from 10% to 5%. These forced banks to hold TRY-denominated bonds on top of required reserves for FX deposits. The CBRT also lowered the threshold from 60% to 57% above which banks were required to pay a higher maintenance. The measures are part of undoing the previous lira-isation strategy. Since Erdogan’s presidential re-election, the ministry of Finance also ended costly FX-interventions to artificially slow the decline in TRY while the CBRT raised its policy rate in first instance from 8.5% to 15%.