Ceasefire talks in Istanbul have shown signs of progress. Before the negotiations, Ukraine showed itself open to neutrality and adopted a non-nuclear status in exchange for security guarantees. Subsequently, and to “increase mutual trust”, Russia said it would significantly reduce military activity around kyiv.. Western officials remained skeptical, but not the stock markets. Shares jumped 3% in Europe and almost 2% in the United States. Intraday oil prices fell 9% but eventually capped losses at just over 2% (Brent at $110/bbl). EMU yields soared. The German 2-year rose more than 15 basis points to trade positive for the first time since sometime in 2014 as markets increased bets on ECB rate hikes. The rapid intraday decline in oil prices, however, provided a counterbalance via the inflation channel. The net changes amounted to 6.4-7.1 basis points at the beginning of the Germany/EMU swap curve and 5.1-5.5 basis points later. In the United States, where some Fed tightening is now ignored, the oil price effect has completely dominated. This resulted in a flattening movement with yields up to 6.4 basis points (10 years) lower. The euro applauded in the FX markets, with EUR/USD testing the first significant resistance level at 1.1121 but eventually closing below 1.1086 (+1 big number). EUR/GBP broke through 0.84 with great conviction and tested the year highs at 0.845. The yen was unprepared for the euro but made a slight comeback against the USD. USD/JPY finished lower from 123.86 to 122.88.

Japanese bonds soar in the (very) long term after the BoJ raised the stake (see below). The yen extends yesterday’s gains, this time also against the euro. Technical considerations also played a role. Both USD/JPY and EUR/JPY have entered overbought territory in recent days and momentum indicators have shown signs of bottoming out. EUR/USD gains to trade above 1.11. Basic obligations increase.

The calendar is starting to heat up today. We have ADP employment in the US and EC economic confidence in the Eurozone. The first inflation readings from member states in February are expected in Germany and Spain ahead of the EMU reading on Friday. A first reading in the German state of North Rhine-Westphalia (7.6% yoy, down from 5.3%) clearly suggests upside risks. Markets will also reflect on the latest promising developments on the geopolitical front and what this could mean for central bank policy. If the sides (Russia) are serious – and that’s a big if – it supports the case for (more, faster) tightening, especially in Europe, even if commodity prices ease. Also keep a close eye on EUR/USD. It tests the upper bound of a closing triangle pattern. Will today’s inflation readings force a breakout higher?

News headlines

Japanese retail sales fell for the third consecutive month by -0.8% M/M bigger than expected, bringing sales also 0.8% below the level of the same month last year. Sales growth in February was further hampered by restrictions to deal with the spread of the latest wave of coronavirus. Data suggests risk of very poor or even negative Q growth1, complicating government efforts to stage a demand-led recovery. In this context, the BoJ stepped up its efforts this morning to prevent an unwarranted rise in yields/ tougher economic conditions. The bank today raised the amounts of bonds it planned to buy during regular operations on the 3-10 year segment. At the same time, he also offered to buy ultra-long JGBs in an unplanned deal. Earlier this week, the bank already announced unlimited purchases of 10-year bonds to protect the 0.25% cap on the 10-year yield. Unlike yesterday, yields are down across the curve today. The 10-year yield is currently trading near 0.21%. The 30-year yield fell to 0.98% from a record high of 1.10% yesterday.

Australian Trade Minister Tehan says Australia and India are close to finalizing a free trade agreement. An announcement could be published in the coming days. According to the Australian government, mutual trade between the two countries was around $24 billion in 2020. Australia’s access to the Indian agricultural market is said to be one of the remaining talking points. The bid to strike a trade deal between India and Australia comes as Australia’s trade relationship with China is under strain.

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