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EU Reached Agreement to Cut 90% of Oil Imports from Russia

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Markets

Surprisingly high and accelerating inflation in Belgium, Spain and Germany defined an exclusively European trading session yesterday (US closed for Memorial Day). European/German yields were already headed north at the open in an attempt to shake off the recent status quo. The inflation figures generated additional momentum with traders ramping up ECB normalization bets. Yields shot up between 6.9-11.1 bps in Germany, the front-end underperforming. European swap yields printed gains ranging from 2.7 bps (30y) to 8 bps (3y).

Brent oil prices extended their recent rise to well north of $120/b, helping yields push higher too. There was probably some speculation involved about the EU ready to ban Russian oil imports. This was indeed eventually agreed upon late yesterday evening (cf. infra).

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

The battle for EUR/GBP 0.85 continues with the pair yesterday again closing above (0.852). PM Johnson is back in the spotlights, with more Conservative MP’s calling for him to quit following the partygate scandal yesterday. Some senior MP’s said Johnson was likely to face a vote of no confidence as leader of the party if the Tories lose two parliamentary by-elections (in Tiverton and Honiton) next month. It’s worth following up.


Asian equities trade mixed this morning. Japan underperforms while China (+1% +) profits from better-than-expected PMI readings (see below). US bond yields jump up to 10 bps in a catch-up move with Fed Waller adding to the move yesterday by backing 50 bps hikes for “several meetings”. Bund futures extend their downtrend. The dollar is this morning’s best performer. DXY rises to 101.59, EUR/USD slips to 1.075.


Today’s economic calendar contains US Conference Board consumer confidence, expected lower at 103.8 from 107.30. House price data may be interesting to take a closer look at too with some other housing series suggesting an over-the-peak market. T

he European inflation figure will grab most headlines though. Expected at 7.8% y/y we see risks for an upward surprise into the 8% following yesterday’s national releases. It may not prompt a reaction as big as yesterday but it should keep (European) yields supported anyway, especially with crude/commodity prices rising further. EUR/USD came close but never really tested the 1.08 big figure yesterday. We’re keen to find out whether the data today is the trigger needed. Resistance at 1.0806 should be taken out for the technical picture to turn neutral.

In Central-Europe we watch for the Hungarian central bank to slow the tightening pace at its meeting.

News Headlines

The EU reached an agreement that is expected to cut 90% of European oil imports from Russia by the end of the year. It is seen as removing a big obstacle for a sixth package of EU sanctions against Russia. According to the agreement, EU oil imports via tankers which amount to about two thirds of Russian oil import will halt immediately. On third of the import comes via the Druzhba pipeline. When German and Poland stop buying Russian oil via this pipeline by the end of the year, EU oil imports from Russia will be reduced by 90%. 10% of the imports via the Druzhba pipeline will be temporarily exempted to address concerns of Hungary and other regional countries that argued it was unable to immediately replace its Russian oil imports. The price of Brent crude oil rose further overnight reaching $123 p/b this morning.

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

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