Mallnow? More Like Mall-later

By Bas van Geffen and Elwin de Groot, strategists at Rabobank

With activity and hence volumes and liquidity in markets subdued as we head into Christmas, it’s turning increasingly ‘manic’ in certain markets. Yesterday was a good day for equities and a bad day for government bonds, even though there wasn’t a very specific driver for that move. Despite more reports that European governments are introducing new measures to curb the spread of Covid, market participants already seem to have made up their minds that the threat of the quick advancing omicron variant is manageable, for now.

Germany, for example, announced stricter social distancing rules to stave off a potential “massive” wave. The measures include a limit to 10 people gathering and this now applies to all people, not just unvaccinated. Still, these measures stopped short of more radical options and are –like in the UK– defying the gloomy projections and warnings by health officials. Clearly, no politician wants to be a party pooper heading into Christmas, unless it is absolutely necessary. France, for example, has already announced some restrictions for the Christmas and New Year’s celebrations but the quick pace of administering boost shots –which is ahead of schedule– means that there is no need for a lockdown at the moment, its government spokesman Attal said on France 2 television.

Another reason for the rise in yields were comments from several ECB officials, although we’d underscore their ambiguity. The overall message that these comments seem to convey is that the Governing Council is acknowledging that uncertainty about whether the inflation wave if about to abate soon or becomes even more protracted is very high and that this also implies that there is more uncertainty as to whether the ECB should at some point (but probably/hopefully not too soon!) respond more aggressively.

For example, Executive Member Isabel Schnabel acknowledged in an interview with Le Monde that there is an upside risk to its inflation projections and that the ECB was monitoring wage growth very closely, which –as we noted yesterday as well– does not seem to be entirely consistent with the message by Ms. Lagarde in the last press conference, when she suggested that the ECB’s projections actually assumed a relatively strong pick-up in wage growth already and that this may not necessarily come to pass. Meanwhile, her Estonian colleague, Muller, said yesterday it is hard to say whether the new covid wave will raise or reduce inflation. His Slovak counterpart, Kazimir, basically argued that the steps taken by the ECB should be seen as the start on a “path towards normalizing monetary policy”. That comment hardly raises eyebrows, so perhaps the reason for the upward move in yields is actually very much driven by gasflation.

Indeed, European gas prices surged to another high after Mallnow station along the Yamal-Europe pipeline reported no Russian inflows for Tuesday.

Furthermore, Gazprom didn’t book any capacity to transport gas through the pipeline for Wednesday either, suggesting that gas is now flowing back to Russia. The Dutch 1 month ahead TTF benchmark rose 22% yesterday. The FT reported that prices are at such high premia over other regions that many ships carrying uncommitted LNG deliveries are now being rerouted to Europe instead. We recall that in the beginning of the gas crisis earlier this year it was the other way around. However, it remains to be seen how much these unexpected LNG shipments will alleviate the shortages in the continent.

The limited supply of Russian gas has led some European politicians to accuse Russia of deliberately withholding gas exports in order to pressure the region to approve Nord Stream 2 and due to the tensions over Ukraine. Gazprom maintains that it is meeting all of its obligations, and Russia denies that the limited supply is connected to these geopolitical issues. The minimal exports could be related to the freezing temperatures in Moscow, but the timing will certainly raise a few eyebrows.

The full halt of exports came on the day that President Putin and German Chancellor Scholtz spoke over these geopolitical issues, and could very well be a show of force. And separately, the Russian president warned NATO against moving troops further east. Putin threatened “to take adequate military-technical response measures and react harshly to unfriendly steps,” although he hopes a diplomatic solution can be reached.

These threats follow an earlier Russian demand that NATO withdraws its troops from former Soviet Union states, and while the US and Russia will discuss new security treaties next month, the US has already said that some proposals were “unacceptable”. Whether this week’s limited gas exports are related or not, these ongoing tensions will see traders brace for potential further supply disruptions through the winter.