Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 05/04/22
Mind the gap: Equity markets continue to recover, while bond markets reflect escalating pessimism over the economic outlook
Emerging market equities led the increase in the past week (+1.9%), with gains across the board, whereas euro area equities rose by +1.4%. Regarding sectors, Energy stocks took a breather, as oil prices declined following Wednesday’s announcement that United States will release nearly one million barrels of crude oil per day over the next six months, from the Strategic Petroleum Reserve.
Strong labor market -- the US unemployment rate declined to 3.6% -- and hawkish Fed rhetoric have accelerated the expected pace of raising interest rates by the Federal Reserve. Financial markets price in a cumulative increase of circa 225 basis points by Q1:2023.
Reflecting concerns that a more aggressive monetary response will not succeed in orchestrating a “soft landing” of the economy, the spread between yields on the 2-Year and the 10-Year US Treasury, inverted last week (-5 basis points). US recessions started, on average, 17-20 months after the inversion in the spread, whereas US equities tended to peak 14 months, on average, after the curve inversion (average S&P500 gains inversion-to-peak: +15%).
Tit-for-tat sanctions and energy-related restrictive measures continue (US, European Union, Russia). According to media reports, the US Treasury Department has prohibited the Russian government from paying holders of its maturing 4.5% coupon USD bond of $552M from reserves (US dollars) held at US banks.
President Putin signed a decree according to which, payments for supplies of Russian natural gas to foreign states that commit unfriendly actions against the Russian Federation, carried out after April 1st , will have to be made in Rubles. If not, contracts would be halted, albeit so far, natural gas flows to Europe continue. Kremlin spokesman, D. Peskov, commented that payments on shipments in progress right now must be made somewhere in late April, or even early May.
Note, that, the Ruble appreciated by 19% against the US dollar (84.6) in the past week, with the Russian currency having recouped circa 91% of the fall since February 23rd.
Higher oil prices have boosted other commodity-currencies. The Norwegian Krone has appreciated by 7% against the EUR since mid-February, reaching its highest level since October 2018 on March 25th (EUR/NOK: 9.48). The windfall gains of income associated with changes in commodity prices is significant (Norway crude oil and natural gas net exports: 20% of 2021 GDP).
The Norges Bank decided on March 23rd to raise its policy rate by 25 basis points from 0.50% to 0.75%, its 3rd rate hike since September, with Governor Bache suggesting a possible further increase in June, based on the Bank’s current assessment of the outlook and balance of risks. Indeed, the policy forecast is higher versus three months ago, indicating a terminal policy rate to around 2.5% at the end of 2024 (from 1.70% previously).
The NOK lost some ground in the past week (-1.9% to EUR/NOK: 9.66) due to i) the decision by Biden Administration to proceed with the release of 180 million oil barrels over six months (or 1mb/d) and (ii) the repricing (higher) of expectations regarding ECB interest rates following the significantly stronger-than-expected euro area inflation (+7.5% yoy).