Peace in Ukraine means energy, the euro and bonds

The start of direct negotiations between Russia and the United States – a month that, on the sidelines of Ukraine itself and its European allies, has left European capitals uneasy, according to research written by Thomas Hempell, head of Macro and Market Research at Generali Investments.

Markets, on the other hand, have been focusing on the boost provided by lower energy prices for Europe if sanctions on Russia are lifted in a peace deal, “which could increase gas supplies. European stocks and the EUR have benefited, with gas prices falling back from previous peaks,” which shows the impact this could have on the environment.

“However, growing fears of a dirty deal and a US withdrawal of security guarantees to Europe will require significant increases in European defence budgets. Markets have responded by rising yields amid expectations of increased bond supply.” European yields may still be headed lower amid lower inflation and ECB rate cuts, “but a rising term premium could provide compensation.”

A Ukraine peace plan could yield more money, “especially as long speculative positions in US dollars make the dollar vulnerable to a correction.” However, with the impact of a peace deal on eurozone growth and the ECB rate path likely to be modest, “we consider the benefits for the euro to be ultimately limited.”

For now, persistently higher US growth, its income advantage and uncertainties over trade and geopolitics remain the main barriers to the euro breaking significantly from an appreciation path.