ECB’s Lagarde Repeats that “a Rate Hike Will Not Occur” Before QE Ends

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ECB’s Lagarde Repeats that “a Rate Hike Will Not Occur” Before QE Ends

Market movers today

Very quiet day on data front, only Swedish industrial production data from December due.

Two ECB speakers on the wires, Villeroy (neutral) and de Cos (dove). After last week’s ECB meeting, the markets will pay close attention to any clues from policymakers on the pace of looming monetary policy tightening. Even the ECB’s dovish camp seems to be preparing for rate hikes, as ECB’s Rehn said last week that a rate hike will be appropriate next year at ‘the latest’.


Also, we continue to keep a close eye on any headlines regarding the Russia-Ukraine standoff.

The 60 second overview

ECB: ECB President Lagarde told EU politicians that “There is a defined sequencing between the end of our net asset purchases and the lift-off date. A rate hike will not occur before our net asset purchases finish”. Markets are pricing 28bp for September and 52 for December. September is aggressive compared to Lagarde’s comments in the sense that it would require a fast end to QE bond buying. In general, investors are not really buying the “gradual tightening” narrative, as investors believe central banks are underestimating how high the underlying inflationary pressure is and we have seen something similar in the US and in the UK. In our view, the March ECB meeting will be crucial, as we receive new staff projections.

Nord Stream 2: At a joint news conference with German Chancellor Olaf Scholz, US President Joe Biden said “we will bring an end to it (Nord Stream 2)” if Russia invades Ukraine. Scholz added that “we are absolutely united”. In relation to this, there was no breakthrough in talks between French President Macron and Russian President Putin.

Equities: Equities ended slightly lower yesterday, with Europe being the exemption. Intraday volatility came down but it remains to be seen whether this is a long lasting thing. This morning yields are posting a new pos- pandemic high and the forces behind the year to date turmoil in equities are still in play. Value defensive outperforming in US and one feel tempted to say of course together with Energy. Energy has outperformed tech by almost 30% this year. In the US, Dow unchanged, S&P500 -0.4%, Nasdaq -0.6% and Russell 2000 +0.5%. Asian markets are mixed this morning with Japanese stocks higher while Hong Kong is lower led by tech shares. US futures are slightly higher while European futures are slightly lower.

FI: It was a rather choppy session yesterday with two themes. The morning session continued to digest the post ECB meeting messages, namely intra euro area spread widening. Hawkish Knot’s comments during the weekend, which were dovish relative to market pricing, of a rate hike in Q4 did not impact the front end pricing which still points to 51bp for Dec22. BTPs-Bund spread widened by 10bp to 165bp initially. However, the afternoon session reversed most of the widening in a constructive environment, also supported by some push-back from Lagarde on the rush to adjust monetary policy during the Q&A session in the EP yesterday, which left the BTPs-Bund spread just 1bp wider on the day. Lagarde made it very clear that there would be no rate hike before end of net APP purchases. The biggest underperformer of the day was Greece with its 10y point widening 20bp to Bunds.

FX: EUR reversed course versus rest of G10 currency space on Monday after the ECB induced rally last week on an otherwise quiet day in FX markets. AUD and CAD outperformed as commodity markets continue to hold up well.

Credit: While equities saw more positive sentiment yesterday, credit markets remained under pressure, with both CDS indices and cash bonds selling off. iTraxx Xover widened 7bp to 321.5bp and Main 1.6bp to 66.4bp. Meanwhile, cash bonds were under further pressure likely driven by sales pressure from credit ETFs. HY bonds widened 16bp and IG 4bp.

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