European risk assets benefited from the news, with the DAX gaining 1.7% on Friday. Turning to bonds, the market was particularly volatile, with the 10Y Bund gaining 2bp (and as much as 9bp intraday). On the other side of the Atlantic, US publications continued to disappoint, with the University of Michigan confidence sentiment index falling sharply, probably due to a significant rise in inflation expectations (to 4.9% for year-ahead inflation).
Rates: following the announcement of an agreement with Germany's Greens to reform the constitution, paving the way for the adoption of the economic stimulus plan, the € curve underwent a steepening, with an upward repricing of the term premium. The yield for the 10Y Bund rose by 2bp to 2.88%, while the 2Y-10Y segment of the German curve steepened by 1bp to 71bp. Despite the announcement, German swap spreads widened, by around 3bp to -12bp in the case of the 10Y Bund (vs. 6-month Euribor). As for sovereign spreads, they tightened, buoyed by the Bund leg and Friday’s rather upbeat environment for risk assets: the 10Y OAT-Bund spread tightened by 1bp to 69bp ahead of Fitch's decision, the 10Y BTP-Bund by 2bp to 113bp. At the short end of the curve, the market is still undecided ahead of the April ECB meeting and is pricing in a 25bp cut with a 54% probability. Finally, as for inflation expectations, the 5Y € swap rose by 3bp, now nearing the 2.20% zone.
FX: the DXY dollar index remained relatively stable, inching down by 0.12% to 103.7, despite the University of Michigan consumer sentiment index falling to 57.9 (some way below the 63.1 consensus) and with the probability of a shutdown this weekend receding. The only G10 currencies that weakened against the US dollar were sterling, the Swiss franc, and the Japanese yen. In the case of the Swiss franc and Japanese yen, two safe haven currencies, they corrected by 0.31% and 0.37%, respectively, on account of the market’s renewed risk appetite (the USD/CHF firming to 0.885 and the USD/JPY to 148.3). The cable pulled back 0.22% to 1.291 in reaction to an unexpected 0.1% contraction of the British economy in January (consensus: +0.1%).
The euro rebounded by 0.23% to 1.088 against the US dollar on news the German government had reached an agreement over an overhaul of the debt brake, which should now be put to Parliament. Turning to emerging currencies, Latin American currencies turned in the best performances against the US dollar, notably the Brazilian real (+1.36%, the USD/BRL pulling back to 5.72) and the Mexican peso (+1.12%, the USD/MXN pulling back to 19.85).
Equities: after what has been a very complicated week, equity indices staged a fine rebound on Friday, with the risk of a US shutdown receding and a fiscal agreement being thrashed out in Germany acting as catalysts. The DAX outperformed (+1.7%). At sector level, banks and industrial cyclicals outperformed in the case of the EuroStoxx. Even so, over the week, indices posted a negative performance, penalised by retail. At the European close, US indices were on course for a more pronounced rebound than their European counterparts, with techs staging a recovery.
After touching 30 on Tuesday, the VIX ended the week at 22. Friday's rebound was not enough to retrace the week's drawdown, with US indices set to underperform once again and record their fourth consecutive negative weekly performance. Marketing communication: This document is a marketing presentation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. C2 - Internal Natixis
Commodities: oil prices traded higher through Friday's session, with Brent up 0.8% near the close, trading around $70.4/bbl. Prices rallied on reports that Chinese state-owned refineries were curbing Russian crude imports on sanctions concerns. Putin's comments on a ceasefire deal (seeking a number of clarifications and conditions) resulted in the market pricing a reduced probability of a quick ceasefire in Ukraine. This was also the primary driver for the European gas complex, with TTF closing 3.8% higher at €42.3/MWh.
Credit: the week’s final session was marked by a tightening of iTraxx indices (-1.6bp for the Main and -6bp for the X-Over), with banks outperforming (-2.4bp for the FinSenior). Pernod Ricard's 5Y CDS widened by a further 3bp on Friday (+6bp in two days) due to the tariff risk, while the Pernod Ricard and LVMH cash spreads stabilised on Friday after having widened by 4bp-7bp. Cyclicals and industrials in general retraced some of their widening on Thursday: in particular, the Stellantis spreads narrowed by 6bp on average after widening by 12bp the previous day. By contrast, real estate investment companies remained under pressure.
