LIVE MARKETS Forex: worrying about an inverted yield curve

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FOREX: WORRYING ABOUT AN INVERTED YIELD CURVE (1221 GMT)

Expectations of monetary policy tightening and hawkish surprises from central banks have supported sterling and other currencies, including the dollar.

But, according to some analysts, this narrative might be over soon, at least for the pound, as a dangerous inverted yield curve could weigh on bullish sentiment.

George Saravelos, global head of forex at Deutsche Bank, highlights that the UK 2s10s yield curve is not far from outright inversion.

“What does curve inversion mean for the pound? Looking at past inversions, GBP almost always trades softer 3-4 months after the curve inverts,” he says.

“Historically the currency appears to catch down to the negative growth signal which the bond market sends.”

But there is more as “these late-cycle dynamics are going to increasingly weigh on the broader dollar too,” he argues.

An inverted yield curve usually means that investors expect inflation to decrease and economic growth to slow down in the medium term.

(Stefano Rebaudo)

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EQUITIES: EUROPE AND BANKS ARE STILL THE SWEET SPOTS (1041 GMT)

Taken for granted that rising rates are set to dampen appetite for risky assets, the search for relative outperformance within stocks becomes crucial for investors.

Morgan Stanley recently revised inflation forecasts upward and expects the rise in consumer prices “to recede in the back half of the year, further supporting a rise in real yields.”

It also flags the inverse correlation between yield levels and global equity valuations, as higher rates trigger compression of price-earning ratio (P/E).

While falling real yields have contributed to the recent outperformance of Growth versus Value, now there is a strong consensus on the opposite trade.

“Another possibility is to look at regions inherently geared to benefit from higher real yields. Chief among them is Europe,” Morgan Stanley analysts say in a research note.

Valuations for European banks “continue to look low in a historical context,” and they lagged the improvement in inflation expectations and CDS spreads, they add.

“The (banking) sector remains the cleanest way within equities to position for more upside in the German 10Y.”

The chart below shows euro zone bank stock index (.SX7E), Germany’s 10-year bond yield and their correlation.

(Stefano Rebaudo)

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UKRAINE TENSIONS EASING, EARNINGS PUSH STOXX UP (0909 GMT)

European stocks are up as selling pressures eased after the U.S. Secretary of State agreed to a meeting with Russia’s foreign minister late next week boosting hopes tensions in Ukraine will de-escalate. Solid corporate earnings are also granting support.

The pan European STOXX 600 (.STOXX) index is up 0.3%, supported by real estate (.SX86P), food and beverage and basic resource materials (.SXPP).

French blue chips (.FCHI) are gaining 0.5%, with shares in Renault (RENA.PA) jumping around 3% as the carmaker swung to profit in 2021 and said it plans to repay the state aid received during the coronavirus pandemic ahead of schedule. read more

The top mover is Finnish drug manufacturer Orion (ORNBV.HE), whose shares jumped more than 20% to the top of STOXX 600 following positive trial results for its prostrate cancer treatment.

(Joice Alves)

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A BREAK IN THE STORM CLOUDS (0820 GMT)

Markets breathed a sigh of relief after the U.S. Secretary of State Antony Blinken agreed to a meeting with Russia’s Foreign Minister Sergei Lavrov, raising hopes of a diplomatic solution to the standoff over Ukraine.

U.S. stock index futures gained half a percent, U.S. Treasury yields have rebounded from New York session lows and safe-haven currencies such as the yen retreated as the positive sentiment calmed jangled investors’ nerves.

But markets remain far from convinced that a diplomatic solution will be found quickly with Ukrainian government forces and Russian-backed rebels in the country’s east trading fresh accusations of shelling and other ceasefire violations. read more

Reflecting the nervousness in broader markets, a gauge of implied volatility in the stock market is within touching distance of a one-year high while currency markets are strewn with large options contracts designed to shield investors in case markets fluctuate wildly if a conflict breaks out.

Away from the incessant beating of war drums, fresh comments from U.S. Federal Reserve officials also provided no relief to markets before arguably the most important central bank policy meeting of the year in March.

Cleveland Fed President Loretta Mester said the Fed needs to move more aggressively to remove policy accommodation than it did following the Great Recession. read more

Her comments reflect an array of views among Fed policymakers in recent days with some officials supporting a measured pace of rate hikes while St. Louis Fed President Jim Bullard, among the notable hawks, supports a full percentage point increase in rates by July.

And though futures have pulled back odds of a 50 bps rate hike next month, world stocks are set for a second consecutive weekly drop, signalling that investor unease on the direction of policy tightening remains a top concern.

Key developments that should provide more direction to markets on Friday:

Data: U.S. existing home sales for January, UK retail sales, Euro area advance consumer confidence reading for February

Macro speaker corner: Fed’s Evans, Waller, Williams and Brainard

U.S. earnings: Deere, European earnings: Allianz, Natwest, Pearson, BASF, Swiss Re

Carmaker Renault plans to repay the state aid it received in the coronavirus pandemic ahead of schedule after it swung to profit in 2021. read more

(Saikat Chatterjee)

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DIPLOMACY HOPES, EARNINGS LIFT FUTURES (0730 GMT)

Futures are slightly up this morning pointing to a start of the day in the black for European bourses as selling pressures have eased amid hopes the U.S. and Russia will de-escalate tensions over Ukraine.

The U.S. Secretary of State agreed to a meeting with Russia’s foreign minister late next week provided Russia does not invade Ukraine, the U.S. State Department said.

The STOXX 600 is still set for a week of declines as heightened Russia-Ukraine tensions eclipsed a slew of encouraging earnings this week.

A new batch of positive earnings – including Eni , Norwegian Air , NatWest (NWG.L), Renault (RENA.PA) and Sika (SIKA.S) – will likely provide some support today.

(Joice Alves)

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