OTP Morning Brief: The ECB’s rate decision comes amid a rising yield environment
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OTP Morning Brief: Escalation continued in the Middle East
Escalation in the Middle East continued, with the Houthis now targeting Saudi facilities, pushing Brent crude prices close to $100 and intensifying global CPI concerns. Despite this, European equity indices showed only minimal movement, while the major US stock indices started the week in negative territory. German exports came in weaker than expected. Hungarian CPI was 1.3% year-on-year in August. Hungary’s budget deficit exceeded HUF 2,000 billion in August, although the figure was distorted by the pre-financing of the RRF program. US and Hungarian bond yields rose, German yields declined, while the forint remained largely unchanged. Today, attention is likely to focus on French industrial data and the Polish interest rate decision.
OTP Morning Brief: Escalation in the Middle East, Iran threatens to establish another restricted zone
The escalating conflict in the Middle East provided further support to oil prices on Monday, intensifying inflation concerns. Iran has also threatened to establish another restricted zone. Brent crude rose to USD 97 per barrel, while the European TTF gas benchmark climbed to nearly EUR 74/MWh. US markets were closed on Monday due to a public holiday. European equity markets closed mixed on Monday, with the Stoxx 600 ending the session flat. Geopolitical risks were offset by a revised estimate showing stronger-than-expected Q2 eurozone GDP growth, as well as the Sentix investor confidence index rising to a four-year high, while investors continue to assess the outcome of the weekend's German elections and prepare for the ECB's policy meeting on Thursday. German long-term yields continued to rise, with the 10-year Bund yield closing near 3.38%. Markets expect another ECB rate hike by year-end following the anticipated September increase. EUR/USD remained above 1.16. Hungarian long-term yields showed movement only at the far end of the curve, with the 10-year yield falling to 5.43%, while EUR/HUF edged above 363. Today, attention will be focused on Hungary’s August CPI data.
European markets turned sharply lower on Wednesday. Google said it will invest at least €13 billion in artificial intelligence infrastructure in Finland over the next two years. The European diesel market remains extremely tight. TTF natural gas prices are approaching €80/MWh. Wall Street indices also closed lower. As Brent rose above $100 and the US Treasury announced a smaller-than-expected bond buyback, both US and German long-term yields moved higher. However, the Japanese 10-year yield corrected to below 2.9% on Tuesday, while expectations of further rate hikes strengthened and the yen appreciated to a seven-month high against the dollar. Today, attention will be focused on the ECB’s rate decision and the US Producer Price Index (PPI) for August.
European equities declined, while the European diesel market remains extremely tight
European markets turned sharply lower on Wednesday. The STOXX Europe 600 fell 1.4%, while the DAX declined 1.7%, the CAC 40 dropped 1.9%, and the FTSE 100 lost 1.3%. Fortum was the top-performing stock in the STOXX 600, soaring 15.8% after the Finnish utility signed a long-term power purchase agreement with Google. The technology giant said it will invest at least €13 billion in artificial intelligence infrastructure in Finland over the next two years. The energy sector was the only one to post gains in Europe, rising 0.3%, while all other major sectors ended the session in negative territory. Shares of Inditex, the owner of Zara, fell 3.6% after the Spanish fast-fashion retailer reported weaker-than-expected Q2 earnings.
In July, French industrial production fell 0.4% month-on-month, missing the consensus forecast of a 0.3% increase. Moreover, the June figure was revised lower. Meanwhile, the National Bank of Poland left its policy rate unchanged at 3.75%.
The European fuel market remains extremely tight. Diesel futures are trading close to $200 per barrel. Record-high refining margins are being driven by the escalating conflict in the Middle East and drone attacks targeting Russian refineries. The widening diesel crack spread, defined as the difference between the wholesale price of diesel and the cost of the crude oil used to produce it, may also reflect seasonal demand factors specific to diesel, as well as refinery maintenance shutdowns that are typically scheduled for the autumn period and related market expectations. Structurally, the EU is short of diesel and typically relies on imports to cover 10-20% of its consumption.
In the region, the Hungarian, Polish, and Czech stock market indices each declined by 0.7% on Wednesday.
The price of European benchmark TTF natural gas rose 2.7% to €79/MWh.
Wall Street indices extended their decline
Wall Street indices continued to drift lower on Wednesday, while Brent crude futures rose above $100 per barrel for the first time since late July. Iran said on Wednesday that it had attacked ten vessels near the Strait of Hormuz, while the US sank five Iranian oil tankers, marking a significant escalation in tensions in the Middle East. The S&P 500 fell 0.5%, the Nasdaq Composite declined 0.6%, and the Dow Jones dropped 0.8%. The sell-off was broad-based, with all sectors ending lower except energy and utilities. Materials, retail, and household and industrial goods were the worst-performing sectors, each posting losses of more than 2%.
According to the latest Reuters survey, around 70% of respondents expect the Federal Reserve to leave interest rates unchanged at next week’s meeting. This is down from 90% in August, when expectations for a rate hold were considerably stronger. At the same time, according to FedWatch data, market pricing now implies a probability of more than 60% that the Fed will raise rates at next week’s meeting.
Developed-market yields mostly moved higher, with the yen standing out as the exception
The yield on the US 10-year Treasury rose by 3.3 basis points to 4.84%, its highest level since November 2023. The increase was partly driven by the US Treasury’s announcement that it would repurchase up to $6 billion of Treasuries with maturities of 10 to 20 years, an amount that fell short of market expectations. However, yields pared some of their intraday gains after exceptionally strong demand was seen at the US government's $39 billion 10-year Treasury auction. On Tuesday, the US Treasury had already successfully sold $58 billion of 3-year notes, while a further $22 billion of 30-year bonds is due to be issued on Thursday. Meanwhile, the German 10-year yield surged by more than 8 basis points to 3.44%, its highest level since 2011. Rising crude oil prices, a widening diesel crack spread, and drought conditions all pose CPI risks in Europe, a development that is also being reflected in bond yields.
The Japanese yen extended its gains from the nearly seven-month high reached on Tuesday, as traders continued to unwind short positions in the Japanese currency. Expectations are mounting that the Bank of Japan will accelerate the pace of its rate hikes, while repatriation flows by Japanese investors are also expected to pick up. The yen closed at 153.55 against the dollar on Wednesday, while the yield on the 10-year Japanese government bond corrected to below 2.9% on Tuesday from its early-September peak above 3%.
The Hungarian 10-year government bond yield rose by 4 basis points to 5.53%. Yesterday, the Government Debt Management Agency (ÁKK) sold HUF 20 billion of discount Treasury bills maturing in April at an average yield of 5.13%, with demand nearly three times the amount offered.
Today's highlights
Asian markets were also trading lower heading into the close. The Nikkei declined 0.5%, while the KOSPI and the SSEC both fell by around 0.4%, and the Hang Seng dropped 1.3%. Meanwhile, the Japanese 10-year government bond yield rose by more than 4 basis points on Thursday, moving back above 2.9%.
Following a relatively quiet day on the macroeconomic front on Wednesday, attention today will focus on the ECB’s rate decision and the US Producer Price Index (PPI) for August. On Friday, the US will release its August Consumer Price Index (CPI), providing a clearer picture of US inflation trends in the second half of the week, ahead of the Fed’s rate-setting meeting next Wednesday.
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