April 20, 2022
“Marine Le Pen is staging her strongest of three bids for the French presidency, but the thought of an extreme-right leader standing at the helm of the European Union is spreading fear among the 27-nation bloc. The outcome of Sunday’s election may not only threaten the EU’s common front, but the sanctions built in response to the ongoing war in Ukraine.”
Sam Cornford, Partner – Head of Trading
US inflation-adjusted bond yields are on the verge of turning positive for the first time since March 2020 in a surge that is heaping further pressure on riskier corners of financial markets. So-called 10-year real Treasury yields have soared more than 1 percentage point since early March, hitting a high of minus 0.04% yesterday. The jump in real yields has been triggered by the Federal Reserve’s bid to slow intense price growth by aggressively tightening monetary policy. The move is already eroding one of the pillars that has underpinned a powerful rally in stocks and riskier corporate bonds from the depths of the coronavirus crisis two years ago. The plunge in real yields on ultra-low risk US government bonds deep into negative territory in 2020 set off a race by investors to hunt down assets that could provide higher returns when accounting for the effects of inflation.
The war in Ukraine will “severely set back” the global economic recovery, with the UK hit harder than most. The International Monetary Fund (IMF) forecasted that the UK will be the worst performing G7 economy next year with the cost-of-living crisis and tax increases projected to slow economic activity to a crawl. The new forecast undermines recent claims by Prime Minister Boris Johnson that the UK was the fastest growing G7 economy thanks to its successful vaccine programme and recovery from the coronavirus pandemic. The IMF says that UK growth will slow as price pressures lead households to cut spending, while rising interest rates are expected to “cool investment.” The UK’s economy is now predicted to grow by 3.7% this year, down from the previous forecast of 4.7% made in January. The IMF added that the UK was the fastest growing G7 economy in 2021 and is forecast to be the second fastest in 2022.
Sterling is stronger against the dollar and weaker against the euro this morning. The UK prime minister, Boris Johnson, offered a “wholehearted apology” for breaching Covid-19 lockdown rules, but Mark Harper, a former Tory chief whip, said Johnson was asking his MPs to “defend the indefensible.” Johnson is scheduled to fly to India today on a trade and diplomatic mission, leaving behind a Westminster that is swirling with criticism of his conduct, amidst a looming key vote. Home secretary, Priti Patel, was forced to defend the government’s policy to send some asylum seekers to Rwanda following criticism from the Conservative backbenches citing “grave concerns.” A member of Congress, Steve Cohen, has urged the Biden administration to place travel bans on senior British lawyers that acted for wealthy Russian clients against investigative journalists. Energy chiefs warned of a “truly horrific” spike in bills in the autumn.
Euro is well bid against most major currencies overnight. Already facing a resurgent menace from the Kremlin, Europe is bracing the rise of a threat from within – the possibility of Marine Le Pen succeeding in the upcoming French election. Multinational companies continue to pay almost 200,000 employees based in Russia despite pledges to suspend or end activities in the country, raising fears of mass sackings or nationalisations as hopes fade for a swift end to war in Ukraine. Russia gave Ukrainian fighters holding out in Mariupol a new ultimatum to surrender on Wednesday as it pushed for a decisive victory in its offensive in the east, while Western governments promised to give Ukraine more military help. Poland will not take or pay for more doses of COVID-19 vaccine under the European Union’s supply contract, its health minister said on Tuesday, setting the stage for a legal battle with manufacturers.
The dollar is weaker than most major currencies in the early morning trade. Senior US officials will be forced to defend Joe Biden’s record on combating climate change after a string of setbacks has thwarted the president’s sweeping agenda. The US will stop enforcing a mask requirement for passengers on public transport, after a US judge ruled the mandate unlawful just days after it was extended in an effort to quell a recent rise in Covid-19 cases. The US Department of Education has cancelled student loan debt for 40,000 people and offered credits to help another 3.6 million pay off their loans under a plan announced yesterday designed to aid low-income borrowers and public servants. The Biden administration opened applications for a $6 billion program to help nuclear power plants struggling with rising costs as it seeks to stop the generators from shutting down under its goal of transitioning to clean energy.
Stocks rose this morning and a selloff in Treasuries paused as investors evaluated the resilience of the global economic recovery to high inflation, a hawkish Federal Reserve and Covid lockdowns in China. European equity futures advanced, while Japan bolstered an Asia-Pacific share gauge. But China dropped after its banks held lending rates, disappointing investors looking for a cut to support an economy sapped by Covid curbs. The dollar declined and the yen revived after a prolonged slump. The yen remains the weakest performer in the Group of 10 this year on the policy contrast with the US: the Bank of Japan offered to buy an unlimited amount of bonds to contain yields, underscoring its desire for loose monetary settings. The fallout from price pressures, Russia’s war in Ukraine and China’s parlous economic outlook continue to shape sentiment.
Main Economic Data/Central Banks/Government (All Times CET)
8:00 a.m.: Germany March PPI
10:00 a.m.: Italy Feb. trade balance
10:00 a.m.: South Africa March CPI
11:00 a.m.: Euro area Feb. industrial production
1:15 p.m.: ECB’s Rehn speaks
2:30 p.m.: ECB’s Nagel speaks
4:00 p.m.: U.S. March existing home sales
5:25 p.m.: Fed’s Daly speaks
5:30 p.m.: Fed’s Evans speaks
6:00 p.m.: Russia March PPI
8:00 p.m. U.S. Fed releases Beige Book
EIA crude oil inventory report
French presidential election debate
Earnings include Tesla, P&G, Anthem, ASML, Nasdaq, CSX, Baker Hughes, M&T Bank, Steel Dynamics, Kinder Morgan, Equifax, Lam Research, United, Heineken, Alcoa