Europe's Alternative to US Treasuries Nears the €1 Trillion Mark

Economic

Bond

Summary:

The European Union has driven the expansion of bonds from the bloc's four major supranational entities, potentially pushing the market for Europe's safest securities beyond the unprecedented €1 trillion ($1.1 trillion) mark.

Europe's market for its safest securities is poised to surpass €1 trillion for the first time in history. The European Union's plan to issue new notes, adding to the existing €995 billion of euro bonds from the region's major supranational issuers, signals an attractive alternative to German bonds. This growth, driven by the EU's debt expansion, is challenging the dominance of US Treasuries and may soon be included in major bond indexes, enhancing their appeal to global investors.

The European Union's announcement of new notes in the coming days is expected to elevate the market for Europe's safest securities beyond the unprecedented €1 trillion mark. Currently, the region's four major supranational issuers, including the EU, have almost doubled their debt supply over the past decade, with the bulk coming from EU sales to fund the post-pandemic recovery. While European bonds are not yet on par with the vast pool of US Treasuries, the growth of supply and improved liquidity is attracting increased demand among global investors.

Traditionally, investors seeking safety and liquidity in Europe have turned to single-country sovereign debt, such as German bunds. However, the expansion of EU debt offers an appealing alternative, providing a small yield pickup for a similar risk profile. Speculation is growing that these bonds might soon be included in major bond indexes, increasing their attractiveness and paving the way for further sales and investment. The rise of the European market for safe assets is especially significant as Europe has struggled to compete with the enormous US Treasuries market, valued at almost $27 trillion.

The growth of EU bonds is notable, with increased supply from entities like the European Investment Bank, European Stability Mechanism, and European Financial Stability Facility. The EU's post-pandemic recovery program, although temporary, has contributed significantly to this growth. As the EU explores funding options for future endeavors, including defense initiatives, the appeal of high-rated European assets becomes crucial. This is particularly relevant given past challenges in developing sovereign bond-backed securities, with concerns about shared liabilities among European countries.

While EU bonds remain modest compared to the vast US Treasuries market, their rapid growth and improved liquidity are garnering attention from global buyers. The creation of a deep set of European safe assets over the past 15 years addresses past criticisms about the lack of such assets in the region. Despite being a fraction of US Treasuries in reserve assets, EU bonds are gaining prominence, reflecting a shifting landscape in the global market for safe-haven assets.

Source: Bloomberg

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Cohen

Cryptocurrency

The world’s largest cryptocurrency traded up 5.6% at $72,156.6 by 22:51 ET (02:51 GMT), remaining close to a record high of $72,771 hit on Monday.

Bitcoin’s latest record highs come as an extension of a rally triggered by the approval of the spot ETFs in January, which invited a heavy amount of institutional capital into the token.

The token was also boosted by MicroStrategy Incorporated , the biggest corporate holder of Bitcoin, buying 12,000 tokens on Monday using debt.

Bitcoin ETFs see $2.7 bln weekly inflows

A report from digital asset manager CoinShares showed on Monday that investment products tracking Bitcoin saw capital inflows of about $2.7 billion in the week to March 10.

BlackRock Inc's iShares Bitcoin ETFcommanded the lion’s share of these inflows, seeing nearly $2.1 billion, while Fidelity saw an inflow of $1.34 billion.

Bitcoin remained the sole driver of capital inflows into crypto markets, with other major tokens, such as Ethereum and Solana, either seeing minimal inflows or outflows.

Digital assets manager Grayscale also saw sustained outflows from its Bitcoin ETF, of $1.7 billion in the past week, as it continued to struggle with increased competition in the crypto ETFs sector.

The Bitcoin ETF approvals earlier in 2024 triggered a mad rush of institutional capital into the world’s largest cryptocurrency, given that they allow for exposure to the token without having to directly invest in crypto.

But even as Bitcoin’s price surpassed 2021 highs, trading volumes in the token, especially in the retail sphere, remained at a fraction of those seen during the 2021 bull run, according to Investing.com data.

The trend raised questions about just how sustainable Bitcoin’s recent rally remained, while also drawing accusations of market manipulation by exchanges and stablecoin operators.

Retail interest had largely dwindled in crypto over the past two years, following a sharp price decline marked by rising interest rates and a string of high-profile frauds and bankruptcies.

Crypto stocks had a mixed performance on Monday. While Microstrategy, which is largely seen as a Bitcoin proxy, rose 4%, exchange operator Coinbase Global Inc and miner Marathon Digital Holdings Inc fell 1% and 12%, respectively.

Coinbase in particular is still squaring off against the Securities and Exchange Commission over the nature of cryptocurrencies.

Source:investing

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Zi Cheng

Traders' Opinions

Economic

Britain witnessed its unemployment rate climb for the first time since July, coinciding with a moderation in wage growth. This development contributes to the growing evidence of a cooling labor market, alleviating some of the inflationary pressures that have been concerning the Bank of England.

According to the Office for National Statistics, the jobless rate rose unexpectedly to 3.9% in the three months leading up to January, up from 3.8% in the preceding quarter ending in December. Meanwhile, average earnings growth, excluding bonuses, declined to 6.1% during this period from 6.2%, marking the fifth consecutive decrease. Furthermore, companies intensified their efforts to reduce jobs during this time.

United Kingdom Unemployment Rate Rose More Than Expectations_1

United Kingdom Unemployment Rate Rose More Than Expectations_2

The data suggests that the central bank's measures to temper demand in the economy are mitigating the pressure on the labor market, thus alleviating the upward push on prices. This development may strengthen the argument for policymakers to consider interest rate cuts later this year.

Yael Selfin, Chief Economist at KPMG UK, remarked, “We anticipate a weakening in the labor market in the forthcoming months, which is likely to slow down wage growth and raise the possibility of interest rate reductions starting from the summer onwards.”

Traders have increased their bets on reduced borrowing costs, fully pricing in four quarter-point decreases in the key rate over the next year.

Although current wage growth rates remain above the level that the Bank of England considers consistent with its 2% inflation target, the latest data reinforce the notion that the trend is moving in the desired direction.

Market expectations regarding the timing of the Bank of England's first rate cut since the onset of the pandemic have been pushed further into the future. Investors now fully anticipate a rate cut in August, which is three months or more later than originally predicted at the beginning of the year. The Bank of England is scheduled to provide an update on its stance next week, although economists anticipate no change in rates.

However, caution has been advised regarding the interpretation of employment and unemployment figures due to issues in the labor force survey that informs these statistics. The survey was halted in October due to declining response rates and was only resumed last month with the publication of recalibrated numbers on unemployment, employment, and inactivity. Consequently, economists are assigning less reliability to these figures.

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Samantha Luan

Commodity

Disruptions on the world’s major trade routes, refinery closures and resurgent demand are pushing up global fuel prices and making forecasts difficult in the run-up to a US presidential election in which inflation will be a key issue.

Increases in the two most-consumed fuels are outpacing those for crude oil in some of the world’s most important markets. US gasoline futures have jumped sharply in recent weeks and are now up by more than a fifth so far this year, while diesel in Europe has risen 10%. Refiner profits are also above seasonal norms in many regions, a sign of tightness as the peak summer travel period approaches.

Interruptions to fuel production — a combination of scheduled work, unplanned outages and drone attacks on Russian facilities — have been lifting prices. They’ve come on top of higher shipping costs caused by Houthi attacks in the Red Sea and drought at the Panama Canal, as well as the supply-chain ructions spurred by Western sanctions on the Kremlin.

And while more than a million barrels-a-day of new refining capacity is set to come online this year, these projects are notoriously prone to delays. The various moving parts are making it tough to forecast how much fuel will be available in a year where global oil demand is set to break another record and voters in the world’s largest economy will head to the polls. Surging Gasoline Prices Add Inflation Risk In US Election Year_1

Surging Gasoline Prices Add Inflation Risk In US Election Year_1

There’s a risk that premium gasoline prices could reach a multi-year high this year, said Mukesh Sahdev, head of oil trading and downstream research at Rystad Energy AS.

“There’s not a lot President Biden can do in time for the election, if this happens” he said. “Strategic petroleum reserves are low, and there are few levers for the US government to pull to lower gasoline prices.”

The average gasoline price at the pump in the US is now 60% higher than at the start of November 2020 — a potentially significant factor for American voters when comparing how well-off they feel now versus when President Joe Biden was first elected. The country’s stockpiles of both gasoline and diesel-type fuels are well below seasonal norms, meaning there’s less of a supply-cushion than normal.

Distillate cracks — the cost of diesel and jet fuel over crude prices — will benefit from very lean inventories and lower production in the short term, as refiners prioritize gasoline output, Goldman Sachs Group Inc. said in a note this week.

One the biggest US refiners, Valero Energy Corp. said earlier this year that it expects a lengthy startup period for new global capacity coming on stream, which will mean the supply-demand balance remains relatively tight for the near future. Surging Gasoline Prices Add Inflation Risk In US Election Year_2

Surging Gasoline Prices Add Inflation Risk In US Election Year_2

Nigeria’s massive Dangote refinery has, after years of delays, finally started to export fuel. But questions remain over when it will reach full capacity and the timeline for specific units — which impact the type of petroleum products it makes — coming online. It’s a similar story for Petroleos Mexicanos’s Dos Bocas plant in Mexico.

“We expect refined product margins to remain elevated and volatile relative to history,” said Daan Struyven, head of oil research at Goldman Sachs. Strong demand growth for refined products will be roughly in line with net gains in refining capacity, this year and next, he said.

Then there’s the question of what disruptions to the supply of crude and feedstocks mean for fuel output. Sanctions on Russian oil, rising US shale production, OPEC+ cuts and changes to global trade flows caused by vessels avoiding the Suez Canal route due to Houthi attacks all feed into decisions about which fuels will be produced. Surging Gasoline Prices Add Inflation Risk In US Election Year_3

Surging Gasoline Prices Add Inflation Risk In US Election Year_3

For the global gasoline market, one of the biggest question marks is over the availability of octane-enhancing blending components used to make the fuel, particularly with the US summer driving season approaching, while environmental regulations are also creating complications.

Sanctions placed on Russia following its invasion of Ukraine have helped lighten the crude slates in Europe and the US, pressuring output of components like alkylate and reformate, said Jorge Molinero, an analyst at Sparta Commodities. The problem is unlikely to go away this year, he said.

Overall, global crude refining capacity is forecast to rise by more than 1.5 million barrels-a-day this year, slightly outpacing demand growth of 1.4 million — although the outlook differs depending on the fuel, said George Dix, a refining analyst at consultancy Energy Aspects Ltd.

Oil product margins are expected to be lower than the previous year, but above historical levels, he said. That’s because of new plants taking time to come online and inefficiencies in refining created by Russian crude and petroleum product rerouting, Dix said.

Source:Bloomberg

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Ukadike Micheal

Stocks

Forex

Economic

Asian equities, driven by Chinese tech firms, posted gains with investor attention primarily on crucial U.S. inflation data. However, anticipation of the Bank of Japan potentially exiting ultra-easy policy as early as next week weighed on the Nikkei. Gold hovered near its record peak, and the dollar remained steady as traders awaited the U.S. consumer price index to gauge the Federal Reserve's potential rate-cutting cycle.

European bourses were poised for a strong open, reflecting positive sentiment, with Eurostoxx 50 futures, German DAX futures, and FTSE futures all showing gains. The Bank of Japan's decision not to purchase Japanese exchange-traded funds on Monday fueled speculation of an imminent shift away from ultra-loose monetary policy, leading to a rise in the yen and a dip in the Nikkei. Changing expectations suggest a growing likelihood of the BOJ ending negative interest rates this month.

The Nikkei closed slightly lower on Tuesday, and the yen weakened after the Bank of Japan Governor hedged optimism about the economy ahead of the central bank's policy meeting next week. Market futures now imply a 47% chance of the BOJ shifting rates to zero at its upcoming meeting, though opinions differ on whether this will occur in March or wait until April.

Chinese stocks, particularly in the tech sector, saw positive movement, with Hong Kong's Hang Seng Index up 2.6%. The broader MSCI's index of Asia-Pacific shares, excluding Japan, rose to its highest in more than seven months, signaling regional market optimism.

Investor focus is set to shift to U.S. inflation data, with expectations for a monthly increase of 0.4% and an annual increase of 3.1%. Concerns over higher-than-expected inflation data are tempered by the realization that the path ahead for inflation may be uneven. Market expectations suggest the U.S. central bank is unlikely to cut rates at its upcoming meeting, but there's a more than 70% chance of a rate cut in June, according to the CME FedWatch Tool.

Analysts anticipate a "soft-ish inflation report," providing relief to markets and potentially influencing the Federal Reserve's stance on rate hikes. The yield on 10-year Treasury notes eased slightly, while the dollar index remained stable. Spot gold, though experiencing a minor dip, remained close to its record high.

The Asian markets exhibit a blend of positive movements and cautious sentiment as investors await key data releases and monitor central bank actions. The dynamics surrounding the Bank of Japan's potential policy shift and the impact of U.S. inflation data will likely shape global market trends in the coming weeks. The technical viewpoint underscores the importance of monitoring these developments, emphasizing the need for a nuanced and strategic approach to navigate the evolving landscape of international financial markets.

Source: Reuters

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Devin

Commodity

Energy

Russia's exports of seaborne coal to Asia have been weakening in recent months, with lower shipments of both thermal grades and metallurgical coal used to make steel.

Exports of all grades of coal were assessed by commodity analysts Kpler at 8.48 million metric tons in February, slightly higher than January's 8.37 million.

However, that small increase came after six straight months of declines, and the February exports were also some 21.6% below the 10.81 million tons for February 2023.

Coal miners in Russia switched from selling mainly to Europe to markets in Asia in the wake of Moscow's February 2022 invasion of Ukraine, which saw Western countries adopt sanctions against Russian energy exports.

Russia's seaborne coal exports to Asia peaked at 14.69 million tons in April last year, almost double the levels in months preceding the attack on Ukraine.

Much of the increase came as Russia boosted shipments to India, the world's second-largest coal importer behind China.

It was able to grab market share in India by offering steep discounts, particularly on thermal coal, which is mainly used to generate electricity.

But Russian thermal coal is finding it harder to compete on price against rival grades from Asia's heavyweight exporters Indonesia and Australia, as well as South Africa, which is known as a swing supplier of coal to both Europe and Asia.

Russia's exports of thermal coal to India dropped to 557,935 tons in February, down from 1.06 million in January and the weakest month since November 2022, according to Kpler data.

Russian delegates at the Coaltrans India conference, held at the end of February in the western state of Goa, said it was becoming harder for them to make any money shipping thermal coal to India.

One representative of a Russian producer, speaking on condition of anonymity, said the rising freight costs had effectively cut profits to zero, and some cargoes heading to India were loss-making.

It's not only higher freight costs hurting Russian thermal coal exports to India, with the prices of competing fuel from other suppliers also moderating in recent months.

Indonesian coal with an energy content of 4,200 kilocalories per kilogram (kcal/kg), as assessed by commodity price reporting agency Argus, ended last week at $58.17 a ton.

This grade has been trading in a relatively narrow range anchored around $58 a ton since November, but it's still well below the 2023 peak of $87.55 in January. Russian Coal Exports to Asia Struggle Amid Lower Prices_1

Russian Coal Exports to Asia Struggle Amid Lower Prices_1

Softer Prices

Australian thermal coal with an energy content of 5,500 kcal/kg, a grade favoured by Indian buyers, ended last week at $95.77 a ton, down slightly from $96.66 the previous week.

It has also been trading in a fairly narrow range around $93 to $96 a ton since November, and is down 29% from its 2023 high of $135.29 reached in mid-January.

The softer prices for Indonesian and Australian coal means that Russian suppliers have had to follow suit.

The coal trade between Russia's European ports and India may also be further threatened by the attacks on shipping in the Red Sea by Yemen's Iran-aligned Houthi group.

While Russian shipments haven't been targeted, shipping companies and insurers have become concerned about transiting the Suez Canal and the Red Sea, with vessels being diverted to the longer and costlier route around the Cape of Good Hope.

Russia's exports of metallurgical coal to Asia have also been struggling, with shipments of 1.73 million tons in February the lowest since August 2021 and down from 2.32 million in January.

Russian seaborne exports to Asia of the higher-energy coal used to make steel peaked at 4.47 million tons in March 2023, and with the exception of June that year they held above 3 million tons a month until November.

However, since then Russia's exports to top buyers India and China have tailed off, with shipments to India falling to a 17-month low of 489,207 tons in February, down from 1.09 million in January and a peak of 1.51 million in March last year.

Russia's seaborne metallurgical coal exports to China were 587,751 tons in February, up slightly from January's 576,435, but these past two months were the weakest since December 2021, and well below the peak of 2.13 million from March 2023.

The overall story for Russian coal exports to Asia is that Western sanctions reduced the number of buyers willing to take cargoes, and now the decline in prices for competing grades is making it harder for Russia's miners to profitably ship cargoes to Asia.

Source: Reuters

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Ukadike Micheal

Economic

Forex

The UK labor market presents a nuanced picture as payrolled employees witnessed a modest rise of 15,000 (0.0%) between December 2023 and January 2024. However, the broader trend reveals a more substantial increase of 386,000 (1.3%) from January 2023 to January 2024. Despite the continuous growth in payrolled employees, there is a noteworthy slowdown in the rate of annual growth. Navigating the Nuances: Insights into the Evolving UK Labor Market_1

Navigating the Nuances: Insights into the Evolving UK Labor Market_1

Looking ahead, the early estimate for payrolled employees in February 2024 increased by 20,000 (0.1%) on the month and 368,000 (1.2%) on the year, reaching a total of 30.4 million. It's crucial to approach this February 2024 estimate with caution, as it is provisional and subject to revision when more data becomes available next month. The volatility in Labour Force Survey estimates, stemming from smaller achieved sample sizes, necessitates careful consideration, urging analysts to view quarterly changes alongside other labor market indicators.

Between November 2023 and January 2024, the UK employment level for individuals aged 16 and over rose on the year but declined on the quarter. The employment rate for those aged 16 to 64 years was estimated at 75.0%, reflecting a decrease from the previous quarter and year.

In the same period, the UK unemployment rate for individuals aged 16 and over stood at 3.9%. Although this rate is above estimates from a year ago, it remains largely unchanged on the latest quarter. The economic inactivity rate for those aged 16 to 64 years increased to 21.8%, surpassing estimates from a year ago and showing an increase in the latest quarter.

Moving to the UK Claimant Count, February 2024 witnessed an increase of 16,800 on the month and 85,800 on the year, reaching 1.585 million. Furthermore, job vacancies saw a decline of 43,000 on the quarter, totaling 908,000 in December 2023 to February 2024. This marks the 20th consecutive quarter of falling vacancies, although they remain above pre-coronavirus pandemic levels.

On the earnings front, annual growth in total earnings (including bonuses) in Great Britain was 5.6% in November 2023 to January 2024. Employees' average regular earnings (excluding bonuses) showed even stronger growth at 6.1%. Adjusted for inflation using the Consumer Prices Index including owner occupiers' housing costs (CPIH), the real terms annual growth for total pay rose by 1.4%, and for regular pay, it rose by 1.8%.

Despite these varying trends, January 2024 recorded 203,000 working days lost due to labor disputes across the UK, with the health and social work industry experiencing the most significant impact.

From a technical viewpoint, the evolving dynamics of the UK labor market hold implications for the broader market. The slowing rate of annual growth in payrolled employees, coupled with fluctuations in other key indicators, introduces uncertainties. The increased volatility in Labour Force Survey estimates may pose challenges for predicting market trends, impacting investor confidence.

The rise in the Claimant Count and the decline in job vacancies could signal challenges in the job market, potentially influencing consumer spending patterns and overall economic activity. Despite the positive note in earnings growth, the overall landscape suggests a need for caution and a comprehensive approach to analyzing the multifaceted impact on the economy.

The UK labor market is navigating a complex terrain with both positive and challenging indicators. While payrolled employees continue to increase, the slowing growth rate and other economic variables suggest a delicate balance. Investors and policymakers must navigate this landscape with caution, considering the broader implications of these trends on the market and the economy as a whole. The technical aspects of smaller sample sizes and increased volatility further emphasize the need for a nuanced and vigilant approach to interpreting and responding to the evolving dynamics of the UK labor market.