REFINING: Sarnia Refinery Reports Process Interruption

• In the FI space, Bund futures are trading closer to their recent lows. Short-term conditions remain bearish. Note that the move down that started on Oct 17 still appears corrective and has allowed an overbought trend condition to unwind. Price has pierced a key support at 129.14, the 50-day EMA. A clear break of this EMA would signal scope for a deeper retracement and open 128.92, 61.8% of the Sep 25 - Oct 17 bull leg. First important resistance is 129.73, Oct 28 high.
• The trend structure in Gilt futures is unchanged, conditions remain bullish and price is holding on to its recent gains. Furthermore, moving average studies are in a bull-mode position, highlighting a dominant uptrend. Sights are on 94.00. Clearance of this level would open 94.24, a 1.618 projection of the Sep 3 - 11 - 26 price swing. Note that the contract is overbought, a pullback would allow this trend condition to unwind. Initial firm support to watch 92.89, the 20-day EMA.

 Corrects EUR 2s3s inflation swap prices

EU member states have agreed to delay ETS2 - the new carbon market pricing scheme  - by one year to 2028. It will now go to the European Parliament for trilogue talks. The ECB had estimated that this scheme would push up 2027 inflation by ~0.3pp in its September macroeconomic projections. If a delay is agreed in the EU Parliament and by the EC, it should imply a mechanical reduction of the 2027 inflation projection December, compensated almost one-for-one with an increase in the 2028 projection (which will be presented for the first time next month). 

• Following the news, the 2s3s EUR inflation curve has seen limited reaction. The 3-year EUR inflation swap is little changed at 1.83%, with the 2-year swap currently at 1.82%. We would have expected some mechanical steepening to occur as markets adjust to the proposed policy changes, but the reaction may be tempered by the fact the policy still needs to go through talks in the EU Parliament.
• Recent policymaker signalling suggests the ECB will avoid making monetary policy decisions (i.e. delivering another cut) solely on the basis of an ETS2-implied undershoot in 2027/2028.
• In an interview released yesterday (i.e. before the ETS2 announcement), Bank of Greece Governor Stournaras told MNI that while the 2028 projections will be a “key input” for the ECB, other data and “judgement” will play an important role. He suggested that he would be more concerned if spot inflation rates fall below target (Flash October headline was 2.1% Y/Y, core was 2.4%).
• Other relevant comments over the last few weeks:
  • Kazaks (31 Oct) "The 2028 forecast will be very important to look at, to see where inflation dynamics are going, but I would not overestimate the importance,"...."Uncertainty remains high and is unlikely to disappear, so forecasts will come with a very large margin of error"
  • Kocher (31 Oct): “The 2028 projection is of course a projection that is far out into the future,” ....“So putting too much weight on this projection, on this single data point, I think would not be appropriate.”

• EUR/USD: Nov06 $1.1400(E1.4bln), $1.1500(E1.5bln), $1.1550(E1.2bln), $1.1600(E1.4bln), $1.1715(E1.5bln); Nov07 $1.1700(E1.0bln); Nov10 $1.1475(E1.8bln), $1.1750(E1.1bln), $1.1770(E1.2bln)
• USD/JPY: Nov06 Y152.00($1.0bln), Y153.00-05($1.2bln), Y154.00-05($1.1bln), Y154.50-55($1.1bln), Y155.00($1.7bln), Y155.35($1.2bln)
• USD/CAD: Nov07 C$1.3900($2.3bln)