The EU has reached an agreement to reduce oil imports from Russia by 90%

Markets

Surprisingly high and accelerating inflation in Belgium, Spain and Germany defined a European-only trading session yesterday (US closed for Memorial Day). European/German yields were already heading north at the open in an attempt to shake off the recent status quo. Inflation figures provided additional momentum as traders increased ECB normalization bets. Yields climbed between 6.9 and 11.1 basis points in Germany as the front end underperformed. European swap yields posted gains ranging from 2.7 bps (30 years) to 8 bps (3 years).

Brent prices extend their recent rise well north of $120/bbl, helping yields to climb as well. There was probably speculation that the EU would be ready to ban imports of Russian oil. This was indeed finally agreed late last night (see below).

Rich interest rate support propelled EUR/USD past intermediate resistance at 1.0758 to close at 1.0779. We also spotted a bit of broad dollar weakness, losing against eight of the G10 peers. The trade-weighted index tested the support at 101.27 (23.6% retracement of the 2021-2022 rise).

The battle for EUR/GBP at 0.85 continues with the pair still closing above (0.852) yesterday. PM Johnson is back in the spotlight, with more Tory MPs calling for him to step down over yesterday’s partygate scandal. Some senior MPs have said Johnson is likely to face a vote of no confidence as party leader if the Tories lose two by-elections (in Tiverton and Honiton) next month. It is worth following.

Asian equity trading mixed this morning. Japan underperforms while China (+1%+) benefits from better than expected PMI readings (see below). US bond yields climbed 10 basis points in a catch-up move, with the Fed Waller adding to the movement yesterday by backing 50 basis point rises for “multiple meetings”. Bund futures extend their downtrend. The dollar is the best performer this morning. DXY rises to 101.59, EUR/USD slips to 1.075.

Today’s economic calendar features US Conference Board Consumer Confidence, expected lower to 103.8 from 107.30. House price data may also be worth a closer look, with some other house series suggesting a market above the peak. J

he European inflation figure will attract most headlines though. Expected at 7.8%y/y, we see risks for an upside surprise in the 8% after yesterday’s national releases. This may not trigger as big of a reaction as yesterday, but it should still keep (European) yields buoyant, especially with crude and commodity prices continuing to rise. EUR/USD moved closer but never really tested the big 1.08 figure yesterday. We are eager to know if today’s data is the necessary trigger. Resistance at 1.0806 should be cleared for the technical picture to turn neutral.

In Central Europe, we monitor the Hungarian central bank to slow pace of tightening at his meeting.

News headlines

The EU has reached an agreement which should reduce European oil imports from Russia by 90% by the end of the year. It is considered the removal of a big obstacle for a Sixth round of EU sanctions against Russia. According to the agreement, EU oil imports via tankers, which account for around two-thirds of Russian oil imports, will cease immediately. A third of imports come from the Druzhba pipeline. When Germany and Poland stop buying Russian oil through this pipeline by the end of the year, EU oil imports from Russia will be reduced by 90%. 10% of imports via the Druzhba gas pipeline will be temporarily exempted to address Hungarian concerns and other countries in the region which argued that it was unable to immediately replace its Russian oil imports. The price of Brent crude oil rose further overnight to hit $123 per barrel this morning.

According to official Chinese PMIs, the pace of contraction in the Chinese economy slowed in May. The measure of activity in the manufacturing sector fell from 47.4 to 49.6. The non-manufacturing sector jumped from 41.9 to 47.8, bringing the composite index to 48.2. The data suggests that the worst of the impact of the corona lockdowns may be over as authorities resort to measures to support activity. However, with indices still in contraction territory, the recovery could remain slow and it will remain difficult for China to reach the growth target of 5.5% this year. The yuan is trading slightly strong at 6.665 USD/CNY this morning.

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