A nervous start to the week, but risk sentiment improves overnight. EU looking to regulate gas market; prices plunge nearly 20%

The new week began on a wobbly note, continuing the price action seen at the end of last week but, overnight, risk sentiment has improved. While US Treasury yields are higher on the day, they are no higher than where we left them at the NZ close. The NZD has picked itself off the floor after trading close to 0.61 and the EUR is back above parity.

The afterglow of Fed Chair Powell’s Jackson Hole speech on Friday night – where he outlined the strong case for rates higher heading and remaining restrictive for some time – set the early tone for the market as the new week began. After the big fall in US equities on Friday, falling steadily and closing at its low for the session, the market was evidently nervous as the new week began.

Yesterday afternoon, risk appetite was poor, with S&P futures down as much as 1.3%, the US 2-year rate up to 3.48%, its highest level since 2007 and the USD DXY index traded at a fresh 20-year high.

Since then, there has been a modest positive turnaround in market sentiment, with higher US equity futures, lower US rates and a weaker USD. The US equities cash market opened weak but traded itself back into positive territory. As we go to print, the S&P500 is down slightly.

Global rates still have a strong upward bias, led by Europe, but US Treasury yields are lower compared to the NZ close. After trading as high as 3.48%, the US 2-year rate is down to 3.42%. The 10- year rate traded just under 3.13% near the NZ close, but currently sits at 3.11% after an uneventful overnight session. European yields show much larger movements for the day, with French and German 10-year rates up 11bps, the latter at 1.50%.

As well the Powell being in the spotlight, a key takeout from last week was more hawkish commentary from ECB members in the face of surging inflationary pressure. The doves are joining in, with ECB Chief Economist Lane, considered one of the most dovish on the committee, speaking overnight. He called for higher rates, arguing “a steady pace that is neither too slow nor too fast, in closing the gap to the terminal rate is important”. The speech outlined the importance of determining the expected terminal rate, the current gap and then assessing the speed at which to approach the terminal rate based on new information. This argued for a “meeting-by-meeting approach.” The speech seemed to infer he was on board for a 50bps hike next month, but unlikely 75bps.

Higher European yields versus US rates have lent some support to the euro but also of note is a rare fall in European gas prices, the Dutch TTF benchmark down almost 20% from the astronomical record high set on Friday, to EUR272/Mwh. EC President von der Leyen said that the EU is “working on an emergency intervention and a structural reform of the electricity market”. One idea is to introduce a maximum regulated gas price used for power generation and to break the link between electricity prices and gas prices. Shell’s Chief Executive warned that Europe may need to ration access to energy for several years as the crisis is expected to last more than one winter.

After trading down close to 0.99 yesterday, the EUR is back around parity. Higher risk appetite has seen the NZD recover from a low of 0.6102 yesterday afternoon to 0.6155. NZD crosses show small gains, apart from NZD/EUR being relatively steady at 0.6155. The AUD has regained a 0.69 handle. JPY continues to struggle against a higher rates backdrop, although has met some resistance at 139 on USD/JPY. GBP has been on the weak side of the ledger as well, still trading lower compared to last week’s close at just over 1.17.

The NZ rates market felt the full force of Friday night’s global bond market sell-off and higher global rates through the afternoon. Clearly, global forces were more in play than the RBNZ’s recent clear message of where it saw the terminal rate, with the 2-year swap rate climbing higher, up 14bps to 4.34%. Some curve flattening was evident, with the 10-year swap rate up 10bps to 4.15%. NZGBs showed a similar move, with the 10-year bond closing up 10bps at 3.98%. Since the NZ close, US and Australian moves have been in the direction of some curve steepening, with lower short-end rates, but relatively steady long end rates, which will set the tone for the open.

In the day ahead, Germany CPI inflation and the US Conference Board consumer confidence index are the two key global releases. The US JOLTs report on the labour market will also be of some interest and NY Fed President Williams will be speaking.