Central banks in focus this week

• Monetary policy will be the main focus this week, with the Fed and the BoE expected to raise their benchmark rates by 25bp.  Of greater interest perhaps for the market will be the Fed’s new economic projections, including a new “Dot Plot” showing how much Fed policy makers now expect interest rates to rise over the next two years. The Bank of Japan and the Turkish central bank are expected to keep rates on hold at meetings this week.
• US data at the end of last week showed consumer sentiment at the lowest level since 2011 in March, as concerns about the war in Ukraine weighed on the outlook, especially for inflation. Inflation expectations for the year ahead rose to 5.4%, the highest since 1981. Longer term inflation expectations were unchanged from February at 3.0%. The University of Michigan Consumer Sentiment index is particularly sensitive to factors affecting personal finances, such as stock market performance, fuel prices and general inflation.
• Russian Finance Minister Siluanov said over the weekend that around half of the central bank’s foreign reserves were inaccessible.  He also said Russia would meet its debt obligations in RUB until its foreign currency reserves are unfrozen. The government has payments due on two USD denominated bonds this week.  Russia’s stock market will remain closed this week.      

Fixed Income

• Benchmark government bond markets fell last week as investor attention sought out any sign of a de-escalation in Russia’s war on Ukraine, even if few can be meaningfully identified, and also as focus turns to central banks and their fight against inflation. A broad index of US Treasuries fell by 1.6% last week as yields moved higher across the curve. On the 2yr UST yields added 27bps to close the week at 1.7480% while the 10yr yield added 26bps to 1.9917%. The 2s10s spread has narrowed to less than 25bps with the risk of inversion looking increasingly likely.
• European bond markets showed a similar path to US Treasuries. The 2yr Schatz yield added 32bps to -0.419% while the 10yr bund added almost 32bps to 0.246%. A more hawkish than expected ECB should provide some more selling pressure in the near term if the focus and commentary remains on the high inflation outlook for the Eurozone. Gilt yields moved higher, up 25bps on the 2yr to 1.304% and 28bps to 1.489% on the 10yr.
• Emerging market bonds endured a volatile week and in the end closed lower in local currency markets. South African yields closed up 3bps on the week at just over 10% though that is lower than 10.7% that they hit mid-week. Indian bonds also sold off with yields adding almost 5bps to 6.859%. Emerging Europe is under heavy selling pressure given direct and indirect linkages to the conflict in Ukraine: Polish 10yr yields added almost 58bps last week to 4.919% with large moves in Czech and Hungarian bonds too.
• S&P affirmed Jordan’s sovereign rating at ‘B+’ with a stable outlook.
• Investor focus this week will be on the FOMC decision where markets are expecting a 25bps hike. The Fed’s revised economic projections will also be in focus as to how the central bank assesses the impact of the war in Eastern Europe on the US economy. Apart from the Fed, the Bank of England is also expected to hike rates by 25bps at its meeting this week while the TCMB is expected to keep them on hold at 14% when the Turkish central bank meets.

FX

• Currency markets showed considerable volatility in the week but in the end waning risk appetite won out and the dollar rallied for a third consecutive week, at least when measured against EURUSD. The broad DXY index added 0.48% last week, more modest than the 2% gain a week earlier. The gains were more widespread with USDJPY adding more than 2% last week to settle at 117.29 while EURUSD was more modest on the weekly close, down just 0.15% at 1.0912 but that disguised some wide intra-day moves.
• GBPUSD was another underperformer, falling by 1.5% last week to 1.3037 even as the market is looking to an additional 25bps hike from the BoE this week, its third hike in a row.
• With commodity prices showing enormous volatility, commodity-linked currencies are in flux. USDCAD added 0.1% to settle at 1.2744, moving solidly in favour of the loonie at the end of the week. AUDUSD sold off by more than 1% to 0.7239 while NZDUSD fell 0.74% to 0.6809.

Equities

• European equity markets recouped some of the sizeable losses of the previous week last week, following gains seen on Friday, as markets latched on to any positive news out of the Ukraine crisis. The DAX gained 4.1% w/w and the CAC 3.3% but given that both indices lost in the region of 10% the previous week, they still have lost ground to recover. In the UK, the FTSE 100 added 2.4% w/w.
• By contrast, US markets continued to sell off last week, with declines driven as much by the prospect of Fed tightening amid accelerating inflation as the conflict in Europe. The NASDAQ remains the most susceptible to these trends, and lost -3.5% w/w, while the Dow Jones dropped -2.0% and the S&P 500 -2.9%.
• Sentiment was largely risk-off in Asian markets, as the Nikkei (-3.2% w/w), the Hang Seng (-3.5%) and the Shanghai Composite (-4.0%) all closed lower. In India, however, equity markets remained buoyant as the Sensex added 2.2% and the Nifty 2.4%.
• Within the UAE, ADX (-0.5% w/w) and the DFM (-1.4%) both closed lower.

Commodities

• Oil prices fell for the first time in three weeks thanks to being buffeted and buttressed by competing headlines. Messaging from the UAE’s ambassador in the US pushed prices considerably lower mid-week though that has been offset to a degree by pressure coming from the US on banning Russian imports as well as signs that the Iran nuclear talks have stopped and are at risk of breaking down.
• Brent futures settled down 4.6% at USD 112.67/ while WTI futures fell 5.5% at USD 109.33/b. Neither of them look particularly cheap, however, as time spreads remain wide. The 1-6 month spread in the Brent market remains wide at a backwardation of USD 13/b.
• Gold prices rallied for a second week running, ending the week up 0.9% at USD 1,988/troy oz. A retest of USD 2,000/troy oz looks imminent given the balance of risks in the market even with the Fed poised to hike rates. In industrial metals, aluminium edged back some of its sharp gains, falling almost 10% last week while the standout was of course nickel despite the essentially broken market it encountered earlier in the week.
• Agricultural commodities are showing wide weekly moves. Wheat futures (soft red winter) fell 19% last week to USD 10.90/bu while corn edged up by a bit more than 1% at USD 7.64/bu.

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