(Jens Nærvig Pedersen – Danske Bank A/S)
Market movers today
A quiet start to another week where central banks remain in the spotlight. German October Producer Price Index will be released today, and in the evening Fed’s Daly will be on the wires.
Later in the week, we expect Riksbank to hike its policy rate by 75bp, which is largely priced in the markets already. Reserve Bank of New Zealand (RBNZ) is also expected to deliver a 75bp hike, while the central bank of Turkey is expected to continue its unorthodox policies with another 150bp cut.
On the data front, the most important releases will be Euro Area and US Flash PMIs on Wednesday, and while markets’ focus remains on forward-looking data, we will also keep an eye out for FOMC and ECB minutes, due for release on Wednesday and Thursday, respectively.
The 60-second overview
Oil: Brent dropped sharply on Friday to as low as USD86/bbl. There was no apparent trigger of the selloff, but it could be a signal about concerns over whether China after all will not begin to ease lockdowns due to a recent rise in infections. A further drop in prices could lead OPEC+ to cut production further.
Climate: Climate negotiators managed a deal on Sunday at COP27. Details have yet to be determined of the fund to be created, which will help compensate poor nations for damages caused by climate change.
US: Atlanta Fed’s Raphael Bostic on Saturday argued for slowing the pace of rate hikes at the December FOMC meeting and thought 75-100bp of additional tightening was warranted. That would take the Fed Funds rate to the 4.5-4.75% range.
Equities: Equities were higher Friday, lifted by defensive value stocks as the inflation relief narrative faded further. Utilities and health care are the two biggest outperformers while energy stocks lower as oil dropped further. VIX stands at 23 reflecting the continued uncertainty in the growth outlook. In the US on Friday, Dow was +0.6%, S&P 500 +0.5%, Nasdaq +0.01%, and Russell 2000 +0.6%. The positive sentiment is not continuing this morning with Asian markets mostly lower. China struggling with increased numbers of Covid infections but also the South Korean export data this morning were yet again dreadful. European and US futures were also lower this morning.
FI: The volatility persists in the market as shown on Friday, where 10Y Bunds initially rose 10bp, but ended the day more or less unchanged at 2%. 10Y Treasuries rose some 5bp during Friday, and the US Treasury curve continued to invert between 2Y and 10Y and is now at -70bp. We are seeing the same pattern in the German yield curve between 2Y and 10Y, which is also inverse as the risk of the recession continues to increase in both the Eurozone and US economies and the lower-than-expected US CPI data.
FX: Last week brought a reversal of the Fed pivot trade with the USD strengthening and not least the Scandies underperforming. EUR/USD is back close to the 1.03 level while EUR/SEK and EUR/NOK are trading close to 11.00 and 10.50, respectively.
Credit: Following a couple of days of widening, sentiment improved again on Friday where iTraxx Xover tightened 14.5bp and Main 3.6bp.