Key Highlights

• KOSPI leads selloff in Asia amid escalation risk in Iran.
• IEA says energy crisis is worse than 1970s shocks and Ukraine war combined.
• Iran threatens to mine Persian Gulf if islands are attacked.

Chart of the Day

CEE currencies holding on despite increased real rate stress

^{Source: BNY}

We see tomorrow’s MNB decision as another test of resilience for high-yielding currencies, which are embarking on the fourth week of the conflict in relatively good holdings shape, despite deteriorating fundamentals. Surprisingly, HUF flows have been solid over the past week; except for some strong outflows at the beginning of the conflict, it remains one of the best performers in EMEA. That holds true across different asset classes, despite the Hungarian government being one of the first globally to enact energy price guarantees, thereby risking severe erosion of fiscal credibility.

The MNB is expected to keep rates on hold, and assuming that near-term CPI figures conform to the prior outlook, a 300-400bp real rate buffer is considered sufficient to limit outflows. However, as is the case for much of the CEE, this is probably the bare minimum that is needed, as energy and labor supply dynamics could force down real rates very quickly. Given that aggressive hikes are now expected in Western Europe, we believe CEE needs to pivot quickly as well, especially in the near term.

Overall, CEE FX flow remains a microcosm of how EM FX flow is behaving in general. PLN and HUF offer liquidity and real rates, even if we believe policy risks are growing in the current environment. For now, the real rate view is sufficient to offset or compensate for very strong fiscal impulses; if the energy crisis worsens, however, then markets may need to revisit their current exposures. Meanwhile, RON and CZK are continuing to underperform. The latter has never been seen in a strong carry context, while the former is now one of the worst-performing currencies in iFlow, simply because it has one of the lowest current real rates of all the currencies we track. RON was the first of the main carry names in EM FX to move into a materially underheld position. It is now being joined by currencies with stressed balances of payments, where currency weakness will also feed into a poor real rate position.

What's Changed?

Risk sentiment is deteriorating in response to fears that the war may escalate further. President Trump has issued an ultimatum to Iran to open the Strait of Hormuz, while Iran has threatened to further escalate attacks in the region. While oil has been relatively tame, equity prices are sharply lower, suggesting more urgent selling off of holdings. Meanwhile bonds are also down on inflation fears linked to an extended supply shock. The FX markets are back to a modest USD bid position, led by emerging markets, with all positions in place at the start of 2026 being rethought as we head into the end of Q1.

Gold: The safe haven of 2025 has unwound, sliding 5.25% on the day to leave the metal down 1.5% on the year. The move in gold is being driven by rates and liquidity demand. G10 interest rates are uniformly higher in response to the oil supply shock – a very different story to 2022. Also notable today is that the speed of selling in shares and bonds has shifted up a level, adding to the need for cash. Silver is now down 10% YTD. The unwinding of gold positions represents risk aversion more than urgency to get cash to buy the dip. Watch for a base at $4,000/oz.

South Korean, Chinese and Indian equities: India’s Nifty Fifty has its volatility index at June 2024 highs, approaching 2022 levels, as the stock index fell 2.5% to one-year lows. INR is down 0.25% at 93.95. The South Korean KOPSI tumbled by 6.5% while KRW fell 0.9% to 11518.05, both linked to oil import concerns. The moves in the stock exchange led to another “sidecar” trading suspension, the tenth of the year. China’s CSI 300 index fell 3.25%, while CNY edged down 0.1% to 6.9075. The Hong Kong HSI fell 3.54%, despite two new IPOs. China has raised its gasoline and diesel prices, while coal prices have also surged. The effect of APAC equity unwinding on gold and FX stands out as an ongoing volatility driver, likely to remain in play unless energy prices drop.

U.K. rates: U.K. 2y bond yields rose 9bp to 4.65%, the highest since February 2024, while the market is now pricing in four BoE rate hikes for 2026. 10y gilt yields are now over 5.05%. This has been the worst month for gilt trading since the rout that followed former Prime Minister Liz Truss’s budget. Current U.K. PM Sir Keir Starmer is calling for an emergency economic meeting. The rate moves are not supporting GBP, which is down 0.3% at 1.3295. The feedthrough from rates to the economy is showing up in politics, with the French regional elections, tomorrow’s Danish vote and last week’s German regional election. Government responses to the energy shock are clearly part of the overall bond market vulnerability.

Bottom line: There is a sense of urgency to the selling of assets this morning that hasn’t been the case since the war started. This could represent a moment of position capitulation. The asymmetric resistance to the ongoing conflict with Iran will likely force more market intervention to maintain stability and function to offset the feedback to the real global economy. Part of the sense of dread is that the timer ticking for some resolution has a reset button and a snooze button, like a Monday morning alarm clock. We are not yet at a clearing price where action and value become obvious. For USD, this means another test of the index over 100; for EUR the key mark is 1.14. For bonds, it keeps 10y U.S. rates of 4.5% in play, and for the S&P 500 it opens up a run to 6200 points. 

What You Need to Know

Ahead of the U.S. deadline to re-open the Straits of Hormuz, Iran has warned that it will target power plants across the region and mine the Persian Gulf if the U.S. proceeds with threats to strike Iranian infrastructure. This heightens the risks to both energy supplies and desalinated water systems relied upon by Gulf states. The warnings came as Israel launched a new wave of strikes on Tehran and regional missile interceptions were reported across the Gulf, underscoring the widening scope of the conflict. Tehran has also signaled that it could fully close the Strait of Hormuz, amplifying fears of a global energy shock, with officials warning of severe economic spillovers. Oil prices have surged sharply since the conflict began, while international agencies have cautioned that the crisis is already exceeding previous global energy disruptions in scale and impact. Brent +1.231% to 113.57, WTI +1.354% to 99.56, Omani -1.549% to 160.2, HH natural gas +1.067% to 3.128, Dutch TTF natural gas +4.397% to 61.86.

The head of the IEA has warned that the current global energy crisis, driven by the U.S.-Israeli war on Iran and the effective closure of the Strait of Hormuz, is worse than the 1970s oil shocks and fallout from the Ukraine war in 2022 combined. Global oil supplies have dropped by about 11 million barrels/day, and LNG supplies by 140 billion cubic meters. The crisis has severely damaged at least 40 energy facilities across nine countries. The IEA is urging measures such as remote working, carpooling and speed limit reductions to curb consumption, emphasizing that unblocking the strait is the key solution.

Saudi Arabia exported 4.355 million barrels/day of crude in March, down from 7.108 million barrels/day in February, amid disruptions from the U.S.-Israeli war with Iran affecting the Strait of Hormuz. For April, Saudi Aramco has cut crude supply to Asian buyers for the second consecutive month, supplying only Arab Light crude via the Red Sea port of Yanbu – which was recently subject to attacks – to long-term customers. The producer is boosting exports through Yanbu to offset Strait of Hormuz disruptions, with record loadings in March. China’s Sinopec is set to load about 24 million barrels from Yanbu in March. Tadawul +0.55% to 10946, USDSAR -0.003% to 3.755,10y KSAB +0.5bp to 5.137%.

France’s municipal runoff elections delivered mixed political signals ahead of the 2027 presidential race, with the left retaining control of key cities while the far right and center-right showed selective gains. The Socialists held Paris through Emmanuel Grégoire and secured victories in Marseille, while the Greens kept control of Lyon, reinforcing a broader left-wing recovery in urban centers. The far right achieved a notable breakthrough in Nice via Éric Ciotti’s alliance with the National Rally, although it fell short in other major targets. Center and center-right forces showed resilience in cities such as Le Havre and Bordeaux but also exposed fragmentation, with losses including François Bayrou in Pau, highlighting an unsettled and competitive political landscape. CAC 40 -1.46% to 7554, EURUSD -0.398% to 1.1526, 10y OAT +5bp to 3.805%.

In the Rhineland-Palatinate state election in Germany, the conservative CDU led with 30.6%, ahead of the social democratic SPD at 25.7%, marking a nine- percentage point drop for the SPD. The populist AfD achieved a record 20% – its best result in a western German state – gaining over eleven percentage points and positioning itself as a strong opposition force. The Greens secured 7.9%, while the FDP and the left-wing Die Linke failed to enter the regional parliament. A grand coalition between the CDU and SPD is likely, with Gordon Schnieder (CDU) expected to be named as state premier. The SPD faces internal personnel debates following the setback. Meanwhile, the Green Party is set to capture the Munich mayoralty, also defeating the incumbent SPD. DAX -1.83% to 21970, EURUSD -0.398% to 1.1526, 10y Bund +1.8bp to 3.061%.

What We're Watching

U.S. February Chicago Fed National Activity Index is expected to ease to 0.04 vs. 0.18 in January.

U.S. January construction spending is forecast to ease to 0.10% m/m vs. 0.30% m/m.

Central bank speakers: ECB Chief Economist Philip Lane gives a speech on AI and Europe’s economy.

U.S. Treasury sells $89bn in 13-week bills and $77bn in 26-week bills.

What iFlow is Showing Us

Mood: iFlow Mood has stabilized at -0.127, halting the recent deterioration, with neutral equity flows alongside continued demand for core sovereign bonds.

FX: Broad outflows across EMEA and APAC, led by ILS, TRY, IDR and SGD. LatAm saw stronger inflows, notably for CLP and BRL. G10 flows were light and mixed, with inflows into USD, JPY, CHF and DKK, versus outflows for GBP, EUR and NOK.

FI: Solid demand for G10 and LatAm sovereign bonds, led by Eurozone, Japan, Brazil and Mexico. EMEA and APAC bonds saw outflows, particularly in Israel, China and Indonesia.

Equities: Mixed overall. G10 equities continued to see selling, led by the U.S. Flows were biased toward buying elsewhere, except for outflows in Colombia and India. The strongest buying was in Poland and Thailand, while selling in Chinese equities moderated.

Quotes of the Day

“Our lives have a countdown clock that we can’t see. Mine reminds me to only do work that matters.” – Donald Miller

“When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.” – Bill Gross

Economic Details

Spain’s industrial turnover fell 3.1% y/y and 1.1% m/m in seasonally adjusted terms in January, while the unadjusted y/y decline was sharper at 6.3%, indicating broad-based weakness in industrial activity. All major markets recorded negative annual rates, with the steepest contraction in non-euro-area external demand at -12.0%, alongside falls in both the domestic and euro area markets. By sector, m/m performance was mixed but predominantly negative; energy (-4.2%) and capital goods (-2.2%) led declines, while durable consumer goods rose 2.1%. By region, turnover decreased across most areas, with only three regions recording growth, highlighting widespread contraction across Spain’s industrial sector. IBEX 35 -1.83% to 16287, EURUSD -0.398% to 1.1526, 10y Bono +4bp to 3.619%.

Spain’s services turnover rose 1.6% y/y and fell 1.2% m/m in seasonally adjusted terms in January, with the annual pace slowing by 3.1 percentage points from December, indicating a loss of momentum in the sector. The unadjusted annual growth was weaker at 0.2% y/y, highlighting softer underlying activity. By segment, “other services” outperformed with 3.3% y/y growth, while trade increased modestly, up 0.7%. By region, activity rose in 11 regions, led by the Basque Country, Aragon and Cantabria, while declines were concentrated in Madrid, Galicia and Asturias. Employment in the services sector increased by 1.1% y/y, suggesting labor market resilience despite weaker turnover dynamics.

Spain’s trade deficit narrowed 35.2% y/y to €4.0bn in January, driven primarily by a sharp 49.2% reduction in the energy deficit amid a 33.2% decline in energy imports. Exports shrank 2.9% y/y to €28.9bn, while imports fell more steeply, down 8.4% y/y to €32.9bn, contributing to the overall improvement in the trade balance. As a result, the coverage ratio increased to 88%, up five percentage points from a year earlier, indicating a stronger export-to-import balance. The non-energy deficit also improved, narrowing by 18% y/y to €2.27bn and reinforcing the broader trend of reduced external imbalances despite weaker export performance. For much of Europe, the energy balance may deteriorate materially in the coming months.

Netherlands’ house prices rose 5.4% y/y and 0.1% m/m in February, indicating stable growth over the last year alongside minimal m/m momentum. Prices have continued their upward trajectory following a decline through mid-2023, and are now 15.5% above their previous peak dating back to July 2022. Market activity also strengthened, with housing transactions increasing by over 8% y/y in February and nearly 7% y/y across the first two months of the year, signaling improved turnover. The average transaction price reached €487,768, although this measure differs from the price index due to quality adjustments, reinforcing that underlying price growth remains steady despite limited short-term movement. AEX -1.08% to 951, EURUSD -0.398% to 1.1526, 10y NGB +1.8bp to 3.206%.

Dutch March consumer confidence fell to -30 in March from -24 in February, marking the sharpest drop in nearly four years and pushing sentiment further below the long-term average of -11. The deterioration was driven primarily by a worsening view of the economic climate, with expectations for the next 12 months and assessments of the past year both becoming more negative. Willingness to buy also weakened, with consumers increasingly pessimistic about their financial situation and less inclined to make large purchases. Overall, the data indicate a broad-based decline in sentiment, reflecting heightened caution among households as both economic expectations and personal financial outlooks continue to deteriorate.

Norway’s domestic credit growth rose 4.6% y/y in February, up 0.1 percentage points from January, with total outstanding debt reaching NOK 7.876tn, signaling a marginal acceleration in overall borrowings. Household debt growth remained unchanged at 4.7% y/y, accounting for around 60% of total debt at NOK 4.680tn and indicating continued stability in household leverage. In contrast, non-financial corporate debt growth accelerated to 4.1% y/y from 3.5%, reflecting stronger borrowing momentum among firms. Meanwhile, municipal debt growth slowed sharply to 4.9% y/y from 6.5%, marking a notable deceleration in local government borrowing. This resulted in a mixed but broadly stable credit environment across sectors. We expect Norges Bank to shift toward very high inflation vigilance at this week’s meeting. OSE -1.43% to 1938, EURNOK +0.699% to 11.1436, 10y NGB +0.9bp to 4.451%.

Polish retail sales rose 5.0% y/y and fell 5.6% m/m in February, recording solid y/y growth but a sharp m/m contraction. Seasonally adjusted sales increased by 4.9% y/y and declined by 1.1% m/m. Over January-February, sales grew 3.8% y/y, up from 2.0% a year earlier, signaling improved underlying momentum. Growth was broad-based across categories, led by fuels (+10.2% y/y), “others” (+9.4%) and household goods (+7.2%), while food sales rose marginally (+0.2%). The only fall was in newspapers and books (-9.3%). Online sales increased by 8.7% y/y, with their share rising to 9.3%, highlighting continued digitalization alongside resilient consumer demand despite monthly volatility. WIG -2.07% to 116826, EURPLN +0.22% to 4.2852, 10y PGB +10.3bp to 5.922%.

Türkiye’s consumer confidence index fell 0.8% m/m to 85.0 in March, down from 85.7 in February, signaling a modest deterioration in household sentiment. The decline was driven primarily by weaker forward-looking components, with expectations for the general economic situation over the next 12 months dropping 2.9% m/m and household financial expectations falling 1.3% m/m. In contrast, assessments of the current financial situation improved, rising 2.0% m/m to 72.8, indicating some resilience in present conditions. Spending intentions on durable goods edged lower by 0.5% m/m. Overall, the data point to softening confidence driven by deteriorating expectations, despite a slight improvement in current household financial perceptions. BI 100 -2.13% to 12770, USDTRY +0.074% to 44.3315, 10y TGB +126bp to 34.65%.

South Korea’s exports for March 1-20 surged 50.4% y/y to $53.3bn, led by a 163.9% rise in semiconductor shipments to $18.7bn, the highest on record for this period. Passenger cars (+11.1%), petroleum products (+49%) and computer peripherals (+269.4%) also grew, while vessel exports fell 3.9%. By destination, exports to China (+69%), the U.S. (+57.8%), Vietnam (+46.4%) and the EU (+6.6%) increased, but Singapore-bound exports dropped 8.5%. Imports rose 19.7% to $41.2bn, with semiconductor imports up 34.3% and crude oil imports up 27.8%, resulting in a $12.1bn trade surplus. KOSPI -6.49% to 5406, USDKRW -0.562% to 1513, 10y KTB +5bp to 3.735%.

Singapore’s February CPI was up 1.2% y/y and 0.6% m/m, with core inflation at 1.4% y/y and 0.5% m/m, indicating modest price pressures alongside stable underlying inflation dynamics. Price increases were driven by transport (+2.7% y/y) and health (+4.2% y/y), while food inflation remained contained at 1.6% y/y despite stronger gains in seafood and fruit categories. Housing and utilities rose 0.3% y/y, with accommodation contributing to m/m gains, while information and communication prices were down (-1.4% y/y). On a m/m basis, declines in private transport costs offset broader increases, while recreation and culture (+1.6% m/m) and housing (+1.3% m/m) provided upward pressure, reflecting mixed but contained inflation trends. STI -2.29% to 4836, USDSGD +0.164% to 1.2842, 10y SGB -2.6bp to 2.121%.