Germany pledges to curb Russian energy imports

• On Friday, Germany unveiled a plan to curb its imports of Russian energy by 2024, as there is growing pressure from other European economies and the US to do more to cut back on any payments to Russia. Chancellor Olaf Scholz has warned that an immediate sanction on Russian energy exports would tip Germany into recession, and Economy and Climate minister Robert Habeck reiterated that the cost to the economy of an instant move would be too great to stomach. However, the plan sees Germany stopping most Russian oil imports this year and most gas by mid-2024.
• Partner countries have pledged to support Germany in its aims, and US President Joe Biden and President of the European Commission Ursula von der Leyen have reportedly agreed to boost US LNG exports to the EU. Renewable energies will also play a part, but the plans remain highly ambitious (Germany does not currently have any LNG terminals), as illustrated by the fact that the German regulator is apparently preparing businesses for energy shortages next summer.
• The pressures facing the German economy were illustrated by the IFO survey released last week which pointed towards deteriorating conditions in the Eurozone’s biggest economy. The country is especially exposed to the fallout from the war in Ukraine, with rising energy costs set to weigh on business activity. The headline index fell from 98.5 in February to just 90.8 for March, missing expectations of 94.2, with much of the fall down to a slump in the expectations component of the survey. This came in at just 85.1, down from 98.4 the previous month and missing consensus forecast of 92.0.
• UK retail sales excluding auto fuel declined -0.7% m/m in February, while the more comprehensive measure declined by a slighter -0.3% – far short of the consensus projection of a 0.7% gain. The decline was attributed to both the cost-of-living crisis, where UK households are seeing their spending power eroded by accelerating inflation, but also poor weather, as  major storms deterred people from shopping. Clothing was a notable gainer as many people returned to the workplace following Covid-related periods of home working, and online sales fell to the lowest proportion of the total since March 2020, down to 22.7% from a peak of 37.7% in February 2021.

Today’s key economic data releases and events

16:30 US wholesale inventories, m/m, February. Forecast 1.2%  

Fixed Income

• Yields on US treasuries continued to rise on the back of increasingly hawkish comments from FOMC members, with the prospect of a 50bps hike at the next meeting looking increasingly likely. The 10-year added 32bps over the week to 2.4731%, levels last seen in mid-2019, while the 2-year added 33bps to 2.2696%.
• Moves were more mixed in European bond markets, where there was less of a one-way movement upwards in the UK. 10-year gilts were at 1.695%, 20bps higher on Friday compared to the previous week’s close, but they had dropped from the 1.708% hit on Tuesday.
• However, in Germany the 0.584% rate on 10-year bunds on Friday was 21bps higher than the previous week and was the highest since 2018.
• Christine Lagarde gave an interview to Cypriot newspaper Phileleftheros over the weekend, where she reiterated the ECB’s latest guidance that the bank’s net asset purchases could end in the third quarter, with the caveat that the bank remains ready to revise its schedule. She also said that the data so far suggested that the risks of stagflation remained low.

FX

• There was little conviction in currency market moves for most of the week, but by Friday the dollar index closed up 0.6% against its basket to settle at 98.79 – off from the haven-play highs seen earlier in the month but still high compared to the past two years.
•  Despite some modest gains later on Friday, the Yen has continued to slump against the greenback, falling -2.4% over the week to 122.05. The currency has depreciated -5.7% against the dollar ytd, taking it to levels last seen in 2015, as the BoJ has remained dovish in the face of an increasingly hawkish Federal Reserve.
• The Euro dropped -0.6% w/w, reflecting the currency bloc’s exposure to higher commodity prices if sanctions against Russia are escalated.

Equities

• Equity markets were mixed last week. Many indices are still driven to an extent by headlines from the Ukraine war, but these appear more priced in in some markets now, with data taking the greater lead. US equities in particular, more insulated from the conflict in Eastern Europe, had a strong week, as the Dow Jones, S&P 500 and the NASDAQ added 0.3%, 1.8% and 2.0% w/w.
• By contrast, Germany’s DAX lost -1.0% w/w, with the economy there far more exposed to the potential hike in gas prices as sanctions strengthen. The CAC also dropped, losing -0.7%, while the FTSE 100 added 1.1%.
• On Friday, Russia’s MOEX index dropped -3.7%, following the 4.4% rally seen the previous day when it reopened following several weeks of closure.
• Within the region, Egypt’s EGX 30 had a particularly strong week following the interest rate hike and currency depreciation on Monday. It closed up 9.2% on Thursday compared to the previous week’s close. Locally, the ADX added 1/7% w/w and the DFM 1.9%.

Commodities

• The prospect of harsher oil sanctions on Russia drove prices back up last week, although the diminishing likelihood of this eventuality in the near term saw some retracement on Friday, aided by talk of the US dipping into the SPR.
• By the end of the week, Brent futures were up 11.8% compared to the previous Friday to USD 120.7/b, while WTI added 8.8% over the week to USD 113.9/b. This was the first weekly gain in three weeks.

Click here to download charts and tables