Some respite for markets

While oil prices remain volatile, they have come down from Monday’s early morning highs. Bond yields have fallen and stocks has risen over the past couple of sessions, while the dollar has given up some of its recent gains. EURUSD and GBPUSD are trading at around $1.1525 and $1.3350 this morning, ahead of the Fed’s policy statement later today, with EURGBP hovering just below £0.8650. While the Fed is expected to keep policy on hold again following today’s meeting, the market will be watching for any hawkish shift in tone on interest rates given the risk that the recent rise in energy prices will keep inflation – already running well north of 2% – above target for longer. The market is currently pricing in one 25bps cut in rates by the end of this year.

There has been some respite for bond markets over the past couple of days. US and German yields have fallen by 5-7bps from last Friday’s close, while UK yields are about 10-12bps lower. Yields generally are heading further south this morning. Similarly, equity markets have rallied so far this week, with the S&P 500 and the Stoxx Europe 600 up around 1.5% and 1% respectively from their close on Friday. Oil prices remain volatile – as Trump’s attempt to put together a ‘coalition of the willing’ to ensure transit through the Strait of Hormuz seems to have come to nothing – though Brent crude is down at around $102 p/b from over $106 at the start of the week.

Not surprisingly, economic sentiment in Germany and the Euro area deteriorated sharpy in early March according to the latest ZEW surveys. They note that escalating conflict in the Middle East, spikes in energy prices, and increased inflationary pressures “heighten the risk” of slower economic growth, with the scale of any impact depending “on the intensity and the duration of the conflict.”

In terms of economic data today, a final reading for inflation in February is due in the Euro area – the initial reading showed the headline rate at 1.9% last month – while producer prices (for February) and factory orders (January) are scheduled in the US.