Europe grapples with Ukraine and tariff risks

EU mid-market update: Europe grapples with Ukraine and tariff risks; US and Canada closed for holiday; German elections next weekend.

Notes/observations

- European defense stocks outperform after the end of Munich Security Conf which shone light on the new reality of Trump Admin’s approach to eastern Europea/NATO and need for Europe to be more self-resilient in defense. European leaders convene an emergency summit in Paris to address Ukraine and security concerns, amid fears of being sidelined in US-Russia peace talks set for Tuesday in Saudi Arabia. UK PM Starmer’s proposal to deploy British troops as part of a European peacekeeping force signals heightened regional urgency.

- Ahead of elections next weekend, Germany’s Scholz warns of EU retaliation against Trump’s April 2nd auto tariffs, while the UK threatens reciprocal measures if excluded from steel/aluminum carve-outs.

- For bond yields, UK gilts under pressure with 10-year yields rise 7bps to 4.57% on defense spending fears. Rightmove warns of a 25% surge in UK home sales ahead of April tax hikes. Markets fret over potential $3.1T in long-term defense spending if US support wanes, lifting German 10-year yields to 2.49%, up about 6bps on session.

- Elon Musk’s AI venture, xAI, is preparing to showcase its flagship model, Grok 3, in a live demonstration on Monday night (23:00ET), highlighting its ability to self-reflect on errors for logical consistency. Grok 3 was reportedly trained using over 100,000 Nvidia H100 GPUs, providing approximately 200 million GPU-hours - ten times the computational power utilized for its predecessor, Grok 2. Musk called Grok 3 "a smartest AI on Earth".

- Looking ahead, quiet session expected with US markets closed for holiday for President’s Day. Futures continue trading.

- Asia closed mixed with KOSPI outperforming +0.8%. EU indices +0.2-1.1%. US futures +0.1-0.2%. Gold +0.7%, DXY +0.1%; Commodity: Brent +0.2%, WTI +0.3%; Crypto: BTC -1.1%, ETH +1.9%.

Asia

- Japan Q4 Preliminary GDP Q/Q: 0.7% v 0.3%e; Annualized GDP Q/Q: 2.8% v 1.1%e.

- Japan Dec Final Industrial Production M/M: -0.2% v +0.3% prelim; Y/Y: -1.6% v -1.1% prelim.

- NZIER Monetary Policy Shadow Board recommended that the Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 50 basis points to 3.75% in the upcoming Feb 19th Monetary Policy Statement.

- China PBOC Gov Pan Gongsheng: Reiterates a more proactive fiscal policy and more accommodative monetary policy. A stable yuan currency had played a key role in maintaining global financial and economical stability,

Global conflict/tensions

- Russia and US officials said to hold negotiations in Saudi Arabia about Ukraine on Tue, Feb 18th; US Pres Trump and Russia Pres Putin might meet there before end-Feb (**Note: Ukraine not invited to initial US-Russia talks in Saudi Arabia).

- US Pres Trump stated that Ukraine Pres Zelenskiy "would be involved" in Ukraine talks. Did not agree that Russia was seeking to wage war on Europe.

- UK PM Starmer said "I am ready to put British troops in Ukraine".

Europe

- ECB's Panetta (Italy) stated that higher US tariffs on European exports were likely to have little effect on region’s inflation.

- UK PM Starmer said to be under pressure to quickly lift defense spending to 2.5% of GDP from 2.3% currently or face new military cuts this year.

- UK Feb Rightmove House Prices M/M: 0.5% v 1.7% prior; Y/Y: 1.4% v 1.8% prior.

Speakers/fixed income/FX/commoditis/erratum

Equities

Indices [Stoxx600 +0.35% at 554.32, FTSE +0.20% at 8,749.50, DAX +1.00% at 22,705.50, CAC-40 +0.10% at 8,186.51, IBEX-35 +0.54% at 13,019.82, FTSE MIB +1.14% at 38,411.00, SMI +0.38% at 12,868.10, S&P 500 Futures +0.18%].

Market focal points/key themes: European indices open higher and traded in the green territory during the early part of the session; among better performing sectors are industrials and technology; underperforming sectors include materials and energy; shares of Assura in London trade sharply higher after it rejected KKR offer, while shares of Galp Energia fell after publishing quarterly results; earnings expected later this week include Alibaba, Walmart, Etsy, Carvana, Block and others.

Equities

- Consumer staples: Bakkafrost [BAKKO.NO] -7.5% (Q4 results, misses estimates).

- Energy: Galp Energia [GALP.PT] -2.5% (earnings; buyback) - Financials: Assura [AGR.UK] +17.5% (rejects KKR offer).

- Healthcare: Bavarian Nordic [BAVA.DK] +2.0% (US FDA Approval of Chikungunya Vaccine for Persons Aged 12 and Older and is on track for commercial launch in US in 1H25).

- Industrials: Thyssenkrupp [TKA.DE] +10.5%, Rheinmetall [RHM.DE] +7.0%, Leonardo [LDO.IT] +4.0%, BAE Systems [BA.UK] +4.5%, Thales [HO.FR] +3.0%, SAAB [SAABB.SE] +8.0% (read out from Munich security conference, with need for larger investment from European members of NATO and less input from US going forward), Demant [DEMANT.DK] +2.0% (HSBC raised to buy).

- Telecom: Telecom Italia [TIT.IT] +1.0% (Poste Italiane confirmed acquiring 9.81% stake in Telecom Italia).

Speakers

- BOE Gov Bailey noted that he saw gradual disinflation process continuing.

- Turkey Fin Min Simsek reiterated govt stance that disinflation would be sustained.

- India Fin Min Sitharaman stated that expected INR350-450B (~$4.3B) to be released in banking system due to income tax measures in budget.

- Russia govt spokesperson Peskov noted that Tuesday’s meeting (Feb 18th) in Saudi Arabia to focus on US-Russian relations. Western peacekeeping forces in Ukraine is very difficult question.

Currencies/fixed income

- FX price action was listless with most participants on the sidelines due to limited economic releases coupled with a US holiday.

- EUR/USD staying below the key 1.05 resistance level.

- GBP/USD stalling at 1.26 with focus on Tuesday’s UK employment data.

- USD/JPY below 152 level following better Japan GDP data as analysts now consider BOJ could again hike interest rates as soon as May.

Economic data

- (SE) Sweden Jan Unemployment Rate: 10.4% v 8.0% prior; Unemployment Rate (seasonally adj): 9.7% v 8.5%e; Trend Unemployment Rate: 8.9% v 8.5% prior.

- (NO) Norway Jan Trade Balance (NOK): 94.8B v 83.2B prior.

- (TR) Turkey Jan Central Gov't Budget Balance: -139.3B v -829.2B prior.

- (CH) Swiss Q4 Preliminary GDP (Sports Adj) Q/Q: 0.4% v 0.3%e.

- (ES) Spain Dec Trade Balance: -€4.1B v -€5.1B prior.

- (IT) Italy Dec Total Trade Balance: €6.0B v €4.0B prior; EU Trade Balance: -€1.9B v -€2.0B prior.

- (CH) Swiss Weekly Total Sight Deposits (CHF): 432.5B v 438.1B prior; Domestic Sight Deposits: 424.4B v 428.1B prior.

- (IN) India Jan Trade Balance: -$23.0B v -$21.0Be; Exports Y/Y: -2.4% v -1.0% prior; Imports Y/Y: +10.3% v 4.9% prior.

- (EU) Euro Zone Dec Trade Balance: €14.6B v €14.5Be; Trade Balance NSA (unadj): €15.5B v €16.4B prior.

Fixed income issuance

- (EU) ESM opened its book to sell EUR-denominated 10-year bonds; guidance seen +45bps to mid-swaps.

Looking ahead

- (NG) Nigeria Jan CPI Y/Y: No est v 34.8% prior.

- (AR) Argentina Jan Budget Balance (ARS): No est v -1.301T prior.

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (DE) Germany to sell €3.0B in 12-month BuBills.

- 05:30 (TR) Turkey to sell TLREF Indexed Bonds.

- 06:00 (IE) Ireland Dec Trade Balance: No est v €8.6B prior.

- 06:00 (IL) Israel Q4 Advance GDP (1st of 3 readings): 5.3%e v 4.0% prior.

- 06:00 (IL) Israel Jan Unemployment Rate: No est v 2.6% prior.

- 06:00 (BR) Brazil Feb FGV Inflation IGP-10 M/M: 0.3%e v 0.5% prior.

- 06:00 (DE) ECB's Nagel (Germany).

- 06:00 (RO) Romania to sell RON500M in 7.4% 2027 Bonds.

- 06:00 (IN) India announces details of upcoming bond sale (held on Fridays).

- 06:25 (BR) Brazil Central Bank Weekly Economists Survey.

- 07:00 (BR) Brazil Dec Economic Activity Index (Monthly GDP) M/M: -0.4%e v +0.1% prior; Y/Y: 3.4%e v 4.1% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:00 (ES) Spain Debt Agency (Tesoro) size announcement on upcoming issuance.

- 08:15 (CA) Canada Jan Annualized Housing Starts: 252.5Ke v 231.5K prior.

- 08:30 (CA) Canada Dec Int'l Securities Transactions (CAD): No est v 16.4B prior.

- 09:00 (FR) France Debt Agency (AFT) to sell €5.9-7.5B in 3-month, 6-month and 12-month bills.

- 09:00 (EU) ECB cheif Lagarde.

- 09:30 (US) Fed's Harker.

- 10:20 (US) Fed's Bowman.

- 11:00 (CO) Colombia Q4 GDP Q/Q: 0.3%e v 0.2% prior; Y/Y: 2.2%e v 2.0% prior; Annual 2024 GDP Y/Y: No est v 0.6% prior.

- 11:00 (CO) Colombia Dec Economic Activity Index (Monthly GDP) Y/Y: 2.3%e v 0.4% prior.

- 17:30 (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index: No est v 86.7 prior.

- 18:00 (US) Fed's Waller.

- 22:00 (KR) South Korea Q4 Household Credit (KRW): No est v 1,914T prior.

- 22:00 (TH) Thailand Central Bank to sell THB60B in 3-month bills; Avg Yield: % v 2.02748% prior; bid-to-cover: x v 1.22x prior (Feb 9th 2025).

- 22:30 (AU) Reserve Bank of Australia (RBA) Interest Rate Decision: Expected to cut Cash Rate Target by 25bps to 4.10%.

- 22:30 (AU) RBA Statement on Monetary Policy (SOMP).

- 22:35 (JP) Japan to sell 20-Year JGB Bonds.

- 23:30 (AU) RBA Gov Bullock post rate decision press conference.