LIVE MARKETS-Forex: worrying about an inverted yield curve

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FOREX: WORRYING ABOUT AN INVERTED YIELD CURVE (1221 GMT)

Expectations of monetary policy tightening and hawkish
surprises from central banks have supported sterling and other
currencies, including the dollar.

But, according to some analysts, this narrative might be
over soon, at least for the pound, as a dangerous inverted yield
curve could weigh on bullish sentiment.

George Saravelos, global head of forex at Deutsche Bank,
highlights that the UK 2s10s yield curve is not far from
outright inversion.

“What does curve inversion mean for the pound? Looking at
past inversions, GBP almost always trades softer 3-4 months
after the curve inverts,” he says.

“Historically the currency appears to catch down to the
negative growth signal which the bond market sends.”

But there is more as “these late-cycle dynamics are going to
increasingly weigh on the broader dollar too,” he argues.

An inverted yield curve usually means that investors expect
inflation to decrease and economic growth to slow down in the
medium term.

(Stefano Rebaudo)

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EQUITIES: EUROPE AND BANKS ARE STILL THE SWEET SPOTS (1041
GMT)

Taken for granted that rising rates are set to dampen
appetite for risky assets, the search for relative
outperformance within stocks becomes crucial for investors.

Morgan Stanley recently revised inflation forecasts upward
and expects the rise in consumer prices “to recede in the back
half of the year, further supporting a rise in real yields.”

It also flags the inverse correlation between yield levels
and global equity valuations, as higher rates trigger
compression of price-earning ratio (P/E).

While falling real yields have contributed to the recent
outperformance of Growth versus Value, now there is a strong
consensus on the opposite trade.

“Another possibility is to look at regions inherently geared
to benefit from higher real yields. Chief among them is Europe,”
Morgan Stanley analysts say in a research note.

Valuations for European banks “continue to look low in a
historical context,” and they lagged the improvement in
inflation expectations and CDS spreads, they add.

“The (banking) sector remains the cleanest way within
equities to position for more upside in the German 10Y.”

The chart below shows euro zone bank stock index,
Germany’s 10-year bond yield and their correlation.

(Stefano Rebaudo)

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UKRAINE TENSIONS EASING, EARNINGS PUSH STOXX UP (0909 GMT)

European stocks are up as selling pressures eased after the
U.S. Secretary of State agreed to a meeting with Russia’s
foreign minister late next week boosting hopes tensions in
Ukraine will de-escalate. Solid corporate earnings are also
granting support.

The pan European STOXX 600 index is up 0.3%,
supported by real estate, food and beverage and
basic resource materials.

French blue chips are gaining 0.5%, with shares in
Renault jumping around 3% as the carmaker swung to
profit in 2021 and said it plans to repay the state aid received
during the coronavirus pandemic ahead of schedule.

The top mover is Finnish drug manufacturer Orion,
whose shares jumped more than 20% to the top of STOXX 600
following positive trial results for its prostrate cancer
treatment.

(Joice Alves)

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A BREAK IN THE STORM CLOUDS (0820 GMT)

Markets breathed a sigh of relief after the U.S. Secretary
of State Antony Blinken agreed to a meeting with Russia’s
Foreign Minister Sergei Lavrov, raising hopes of a diplomatic
solution to the standoff over Ukraine.

U.S. stock index futures gained half a percent, U.S.
Treasury yields have rebounded from New York session lows and
safe-haven currencies such as the yen retreated as the positive
sentiment calmed jangled investors’ nerves.

But markets remain far from convinced that a diplomatic
solution will be found quickly with Ukrainian government forces
and Russian-backed rebels in the country’s east trading fresh
accusations of shelling and other ceasefire violations.

Reflecting the nervousness in broader markets, a gauge of
implied volatility in the stock market is within touching
distance of a one-year high while currency markets are strewn
with large options contracts designed to shield investors in
case markets fluctuate wildly if a conflict breaks out.

Away from the incessant beating of war drums, fresh comments
from U.S. Federal Reserve officials also provided no relief to
markets before arguably the most important central bank policy
meeting of the year in March.

Cleveland Fed President Loretta Mester said the Fed needs to
move more aggressively to remove policy accommodation than it
did following the Great Recession.

Her comments reflect an array of views among Fed
policymakers in recent days with some officials supporting a
measured pace of rate hikes while St. Louis Fed President Jim
Bullard, among the notable hawks, supports a full percentage
point increase in rates by July.

And though futures have pulled back odds of a 50 bps rate
hike next month, world stocks are set for a second consecutive
weekly drop, signalling that investor unease on the direction of
policy tightening remains a top concern.

Key developments that should provide more direction to
markets on Friday:

Data: U.S. existing home sales for January, UK retail sales,
Euro area advance consumer confidence reading for February

Macro speaker corner: Fed’s Evans, Waller, Williams and
Brainard

U.S. earnings: Deere, European earnings: Allianz, Natwest,
Pearson, BASF, Swiss Re

Carmaker Renault plans to repay the state aid it received in
the coronavirus pandemic ahead of schedule after it swung to
profit in 2021.

(Saikat Chatterjee)

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DIPLOMACY HOPES, EARNINGS LIFT FUTURES (0730 GMT)

Futures are slightly up this morning pointing to a start of
the day in the black for European bourses as selling pressures
have eased amid hopes the U.S. and Russia will de-escalate
tensions over Ukraine.

The U.S. Secretary of State agreed to a meeting with
Russia’s foreign minister late next week provided Russia does
not invade Ukraine, the U.S. State Department said.

The STOXX 600 is still set for a week of declines as
heightened Russia-Ukraine tensions eclipsed a slew of
encouraging earnings this week.

A new batch of positive earnings – including Eni,
Norwegian Air, NatWest, Renault and
Sika – will likely provide some support today.

(Joice Alves)

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