The situation in the Ukraine got a bit calmer yesterday on the back of Putin’s press conference where he said he saw no immediate need to invade eastern Ukraine. The situation is still extremely tense, not less so with the US now physically present in the Ukraine in the form of Secretary of State Kerry who formally is in Kiev with the contours of a financial aid package (reportedly for 1bn USD), but surely also is there for geopolitical purposes. The situation casts a shadow over almost everything else, including the upcoming ECB meeting and Friday’s non-farm payroll report.
10 year treasuries sold off the most since November with yields soaring 10bps to just below 2.7%. Similarly, on the EUR side, bund futures got below 145 again. The pattern was similar on stock indices. The Russian MICEX index displays the most volatility and yesterday rebounded over 5% after Monday’s fall of almost 11%. US and European indices increased as well, as does the Nikkei index this morning. Expect more daily and intra-daily volatility going forward as this situation progresses.
Calendar is primed for buying 1M options
Indeed, regarding volatility: The calendar is aligned right now so that the next month covers two ECB meetings and two Non-farm payrolls. While we see no easing from the ECB tomorrow (see below and here), the risk is certainly tilted for more easing down the road and it will be interesting to see if the weather explanations used for the last two disappointing payroll reports actually hold up. There’s a clash between the weather believers which include Janet Yellen and most economic forecasters and the skepticism in the market pricing, but the clash is not huge. To a large extent the market has bought the weather explanation as the culprit for weak US key figures in 2014.
In addition to these scheduled events, we have the ongoing critical situation in the Ukraine and, within the next month, we also have the EUR inflation flash on the 31st of March which recently has been a vol-generator and this time the potential is perhaps even amplified as a cyclical low is to be expected on March’s Eurozone inflation.
Implied volatilities on EUR swaptions continue to trade fairly low. For instance, 1M5Y/1M10Y trades at 52/53.5 bpVols respectively. These levels are quite near the bottom of the range of the last year and around half the level seen in June 2013 when Bernanke launched the tapering speculations. We find these levels attractive for covering the broad scope of uncertainty lined out above.
No easing from the ECB this time round
Our call on the ECB tomorrow is that the ECB is on hold. In our view easing is simply not necessary at this time. Flash inflation surprised on the upside last Friday and there’s no great distress in the money markets and certainly less than there was a month ago where the central bank stood still. Much has been made of the Bundesbank clearance regarding the SMP-sterilization (the SMP was sterilized fully yesterday). But just because you have an option doesn’t mean you have to use the option.
Ending SMP-sterilization is a band aid which should be used if liquidity stress really spikes and something easy and direct needs to be used to address it short term. It is not a durable policy tool. Opinions regarding is ranges from “retro-active QE” to “just the sensible thing to do”. It could be both, but as stated, in our view, the timing is just not now.
Today’s calendar kicks off a heavy second half of the week
PMIs across the board, from the service sector primarily – Germany, Great Britain, Sweden, and the Eurozone combined. Further for the Eurozone, we have Q4 2013 GDP numbers and retail sales numbers for January. In the US, we get a warm-up to Friday’s NFP in the ADP, we get non-manufacturing ISM and finally tonight the Fed’s Beige Book.
Still no intervention from the Danish Central Bank
13 months without intervention in the currency market from Nationalbanken – a new record. This is despite a semi-weak currency (judged against history) near levels where the central bank previously has acted either by intervening or by hiking rates (Denmark still have a negative deposit rate)
Auction supply
Germany heads today’s supply with 4bn Bobls. Japan has sold 6M notes for 3.5 trillion yen this morning at a rate of 3.4bps and with a bit to cover of 7.22.
Nordea