Rates Spark: Pessimism Sets The Tone In Markets

(MENAFN- ING) Without a clear path forward, markets are worried about the future

US President Trump's rhetoric about“boots on the ground” appears to be intensifying, but markets are cautious about reacting to every headline. At times, signals have been contradictory: on the one hand, Tuesday's threats of bombing infrastructure, and on the other, WSJ headlines suggesting Trump was also willing to end the war without reopening the Strait of Hormuz.

With the risk of a more prolonged conflict still difficult to dismiss, market pessimism is shaping the overall tone. In the rates space, this means the belly of the curve is likely to face further downward pressure as the medium‐term growth outlook deteriorates. A more muted long-term growth outlook is also seen in real rates, which started to decline on Tuesday. That said, oil prices remain the dominant driver of the EUR swap curve, and with Brent trading around $115 per barrel, we see limited scope for meaningful downside.

The upcoming long Easter weekend may encourage investors to de‐risk ahead of the break. In the absence of a clear path forward, upside risks to oil prices remain substantial. Both the US and Iran appear willing to escalate further, and with Trump's 6 April deadline approaching, markets should brace for renewed volatility. Consistent with this, the VIX index, a key gauge of risk appetite, is showing no signs of easing.

US rates have also come down on the back of more dovish comments from the Fed's Powell. In terms of the Fed discount at the front end, what had morphed into a hiking bias has now returned to a – still very mild – cutting bias.

Powell had argued that the Fed had limited means to directly counter a supply shock, but could only manage inflation expectations. He considered these contained for now, providing the market with some relief. And an opportunity to perhaps focus more on the economic fallout.

Tuesday's events and market views

The eurozone publishes the flash CPI for March, which the consensus expects to jump to 2.6% from 1.9% year-on-year. That itself does not tell much beyond the fact that energy prices have risen. More important would be indications of second-round effects, for which it is clearly too early. Core inflation is seen remaining at 2.4%. With Panetta, Sleijpen, Kazimir and Mueller, there is once again a busy slate of ECB speakers.

We will also be watching the ECB's main refinancing operation, which had seen an uptick last week. A drop back in the allotment would confirm more quarter-end related shifts, rather than a squeeze on other funding sources. Quarter-end (amid a general shift to shorter tenors in current market circumstances) is also likely behind the 1m Euribor dipping more noticeably below ESTR OIS recently, and we will also be looking at the fixings in the coming days for this to reverse.

The US will be looking at the JOLTS job openings data as well as the consumer confidence for March. The Fed's Goolsbee, Barr (on stablecoins) and Bowman are slated to speak.

In primary markets, Germany will auction €5bn in 2y bonds.

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