Deutsche Bank Research’s Early Morning Reid notes that European assets are sensitive to the renewed energy shock. Market pricing for ECB hikes by December rose sharply, implying a chance of three hikes this year after June’s move. Sovereign bonds sold off, with 10-year Bund yields posting their biggest daily jump since May and French OATs reaching their highest level since 2009.

ECB expectations and yield surge

"Meanwhile at the ECB, there was an even bigger hawkish repricing, with the amount of hikes by December up +12.7bps on the day to 39.5bps."

"And given the ECB already hiked in June, that pricing implies a growing chance that they might end up hiking 3 times by the end of the year."

"Just like when the conflict began, yesterday’s re-escalation caused significant damage to sovereign bonds, particularly in Europe given the region’s exposure to the energy shock."

"So 10yr bund yields (+9.9bps) surged back up to 3.09%, marking its biggest daily jump since May."

"And over in France, there was an even bigger milestone, as the 10yr OAT yield (+13.5bps) closed at 3.93%, marking its highest level since 2009."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)