Yield Curve Flattens, Draghi Stays, Oil Pushes Higher - What's Moving Markets

© Reuters

By Geoffrey Smith 

Investing.com -- The dollar steadied as signs increased that the markets are comfortable with their adjustment to a new interest rate path in the U.S. Tensions with Russia continue to bubble as the Senate prepares broader sanctions. Oil prices continue to push higher amid concerns that OPEC+ can't keep up with rising global demand. And Italian assets rally as Mario Draghi prepares to serve a full term as Prime Minister. Here's what you need to know in financial markets on Monday, 31st January. 

1. Markets steady as yield curve flattens

The dollar steadied and global markets were mixed as a wild January approached its conclusion, with a growing sense that the market has adjusted to new expectations for U.S. interest rates this year.

By 6:45 AM ET (0845 GMT), Dow Jones futures were down 172 points, or 0.5%, while S&P 500 futures were down 0.2%. However, Nasdaq 100 futures were up 0.3%. In the bond market, 2-Year Treasury yields have stabilized around 1.20% after rising nearly half a percentage point since the start of the year. The 10-Year yield has retreated back to 1.79% from a high of 1.87% last week, suggesting that the market has regained some confidence that the Fed will keep inflation in check in the medium term.

Stocks likely to be in focus later include Citrix (NASDAQ:CTXS), after a report suggesting that the price of the Elliott/Vista-backed buyout for the remote access software stock is likely to be below Friday’s close, and U.K. cell carrier Vodafone (NASDAQ:VOD), which reportedly has a new activist shareholder to deal with in the form of Swedish-based Cevian.

L3Harris and, after the bell, NXP (NASDAQ:NXPI) are both due to report earnings later.

2. Ukraine tensions bubble on

The weekend brought no sign of a meaningful de-escalation of the tensions around Russia and its plans for Ukraine.

The U.S. Senate is reportedly close to preparing sanctions that would further restrict Russian banks’ access to international markets and limit Russia’s ability to borrow in dollars. However, talk of the country’s banks being excluded from the SWIFT financial messaging system – which would restrict but not end Russian banks’ access to international capital markets – has again died down, amid concerns that it would also disrupt global energy markets.

The U.K., which has allowed Russian money to circulate freely through its financial system despite promising a crackdown after the invasion of Crimea in 2014, has also said it is preparing to tighten its regulations.

3. Carry on, Mario

Italian bonds and stocks rallied after news that 83 year-old Sergio Mattarella will continue for now as the country’s president, after a series of votes by parliamentarians last week failed to agree on any alternative candidate.

That means ex-European Central Bank President Mario Draghi will continue to head the government, possibly serving out a term that is set to last until elections next year. That in turn means that Italy is likely to stay on a relatively predictable economic and political path for this year, allowing it to receive tens of billions of euros in payments from the EU’s groundbreaking Next Generation program, which goes further than any previous mechanism for fiscal transfers between various parts of the bloc.

The spread between the German and Italian 10-year bonds, a touchstone for Eurozone financial stress, fell to its lowest in three weeks.

4 Eurozone GDP plods on; CPI peak may have passed

The Eurozone economy had an unspectacular fourth quarter, as supply chain woes in Germany offset what was a firmer-than-expected rebound in France, Italy and Spain.  Eurozone GDP rose 0.3% on the quarter, as expected, after Italy reported a better-than-expected 0.6% increase and Austria reported a painful 2.2% contraction due to an early and severe lockdown in December.

Arguably of more importance, preliminary consumer inflation numbers in Germany are expected to show their first clear decline as a VAT hike that took effect at the start of last year passes out of the calculations.  Spanish consumer prices fell 0.5% on the month, bringing the annual rate down to 6.0% from 6.5%.

5. Oil pushes higher on fears of OPEC+ impotence

Crude oil prices resumed their upward march ahead of a key meeting by the world’s largest exporters later in the week.

In addition to concerns about the stability of Russian energy exports in the event of war between Russia and Ukraine, analysts are also concerned by the seeming inability of OPEC and others to continue delivering on their stated policy of gradual output rises. The OPEC+ bloc is currently producing over 600,000 barrels a day less than it had foreseen when it embarked upon that course last year.

The United Arab Emirates, another major exporter, said earlier it had had to intercept yet another missile strike from Iran-backed rebels in Yemen overnight.

By 6:40 AM ET (1140 GMT), U.S. crude futures were up 0.6% at $87.30 a barrel, while Brent crude futures were up 0.6% at $89.03 a barrel.