Deutsche Bank Research said European assets have been reacting to a renewed energy shock, prompting a hawkish repricing of expectations for the ECB. Market pricing for rate rises by December increased by 12.7bps on the day to 39.5bps, and with the ECB already having delivered a June hike, the curve points to a growing chance of three moves by year-end.<\/p>\n\n
Sovereign bonds sold off as yields pushed higher across the region. The 10-year Bund yield rose 9.9bps to 3.09%, its biggest daily jump since May, while France\u2019s 10-year OAT yield climbed 13.5bps to 3.93%, the highest closing level since 2009.<\/p>\n\n
We are seeing a significant hawkish repricing for the European Central Bank, driven by a renewed energy shock. Dutch TTF natural gas futures have surged over 20% in the last two weeks to over \u20ac55 per megawatt-hour, fueling new inflation worries. The market is now pricing in a strong possibility of three total ECB rate hikes by December.<\/p>\n\n
The sovereign bond selloff is accelerating, and we see further weakness ahead. With the German 10-year Bund yield pushing past 3.15%, its highest level this year, we believe short positions in Bund futures offer a direct way to trade this momentum. French OAT yields hitting their highest since 2009 signals that the pain in government debt is widespread.<\/p>\n\n
This environment should provide a tailwind for the Euro, which we’ve seen climb toward 1.09 against the U.S. dollar. We suggest traders could use call options on the EUR\/USD pair to position for further upside as rate differentials shift in the Euro’s favor. However, we are mindful of the 2022-2023 hiking cycle, where persistent recession fears eventually capped the currency’s strength.<\/p>\n\n
Higher rates are a direct threat to equity valuations, and we anticipate increased market turbulence. The latest Eurostat flash estimate showing headline inflation ticking up to 2.8% will only add to the pressure on stocks. We believe buying put options on the Euro Stoxx 50 index is a prudent strategy to hedge against a potential market downturn in the coming weeks.<\/p>\n\n\n\n