(Danske Research Team – Danske Bank A/S)
Market movers today
We kick off the week with a thin key figures calendar. In the US, we get the Empire manufacturing PMIs.
In Sweden, Moderate leader Ulf Kristersson will face the PM vote today at 11.00 CET.
Markets’ focus will circle on politics this week with the EU council meeting on Thursday, where an EU gas price cap will be on the agenda.
China’s 20th National Congress of the Communist Party kicked off yesterday and lasts for about a week. With no changes to “zero-Covid policies” in the pipeline, focus will not least be on the revelation of China’s new Standing Committee.
The unfolding of UK politics and the effects on the Gilts market have been key market movers over the last couple of weeks and will likely draw more attention.
Markets will also stay alert to any news of actual FX intervention from Bank of Japan after USD/JPY has reached the highest levels since 1990.
The 60 second overview
China CPC Congress: Chinese President Xi Jinping yesterday opened China’s 20th National Congress of the CPC with the read-out of the Work Report, which is a report always prepared for the Congresses that outlines results over the past five years and outlines policies and goals for the coming years and decades. The report had few surprises as policies were pretty much the same as outlined on previous occasions such as in the Five Year Plan released last year. Challenges, risks and security had an even more prominent role this time, though, as China faces severe challenges both from the US tech war as well as domestic challenges with property crisis and the pandemic still affecting the economy. As expected, there was no indication of change to the zero-Covid policy. Over the coming week, meetings will mostly be held behind closed doors and the next action will be on Sunday when the new Standing Committee, China’s top leadership is revealed. Xi will probably also be elevated to ‘People’s leader’, a title that will cement his power. See also Research China – Security and risks highlighted in Xi’s opening of Congress, 17 October.
UK: During Friday, there was a large focus on both the political situation and the Bank of England’s (BoE) last day of the re-introduced temporary QE-program. Headlines of a potential U-turn on the tax package initially resulted in a rally in gilts markets. Liz Truss sacked her Chancellor Kwarteng, named Jeremy Hunt as her new Chancellor and held a press conference which gave more questions than answers. She backtracked on the corporate tax cut, which accounts for GBP 18bn of the announced GBP 43bn fiscal plan set out with the mini-budget on 23 September. In the end, markets were not really impressed and there was a sell-off in gilts with the 30Y ending the day 40bps higher, as the cancellation of the 18bn tax cut will probably not be enough to put the UK back on track on a sustainable fiscal path. As the BoE’s emergency bond buying program has now come to an end, there is a large risk of further volatility during the week. Bond auctions on both Tuesday and Wednesday will be important to follow.
PBoC: The People’s Bank of China (PBoC) rolled over 500 billion yuan maturing medium-term policy loans while keeping the interest rate unchanged at 2.75% this morning. According to PBoC, this was to “keep banking system liquidity reasonably ample” and to “fully meet financial institutional demand”.
Equities: If there is something this year has highlighted, equity rallies are not long lasting when fundamentals do not allow it. This message was echoed on Friday, where the Thursday rally quickly erased in the US cash session. S&P 500 dropped -2.3%, Nasdaq -3.1%, Russell 2000 -2.7% and Dow -1.3%. Guess what – defensives outperformed cyclicals and value outperformed growth. Recognize it? Probably, as markets have played the same note since summer. Two things differing from the classic risk-off trading is small caps and quality stocks holding up – despite US yields being 60bp higher over the month and real rates 150bp since August. To us, this illustrates the balancing act of short-term inflation and longer-term recession. Asia opened in red this morning, with MSCI’s broadest index of Asia-Pacific shares outside Japan down 1.1% and Nikkei down 1.4%.
FI: A bit of sideways trading on Friday until Vasle called for two 75bp rate hikes this year, which caused a bear steepening in the euro curves with underperformance of the periphery (6bp to BTPs-Bund widening). Bunds rose 7bp to 2.36%.
FX: Higher yields, a decline in commodity prices, high equity volatility and UK politics set the tone for FX markets towards the end of last week. The USD generally stood out as a top-performer only surpassed by the HUF following the National Bank of Hungary’s (NBH) surprise hike of its overnight rate from 15.5% to 25%. In the other end of the spectrum, GBP came under renewed pressure while commodity currencies in the likes of AUD, NZD and NOK also suffered. USD/JPY has notably reached new highs above the 148 mark.
Credit: The credit markets ended last week on a slightly negative note. During Friday, iTraxx main widened marginally to 131bp while Xover widened 7bp to 625bp. The weakness in the CDS market was also visible in the cash bond market, where secondary bond trading and primary markets remained very inactive.
In Sweden, we have a PM vote to look forward to. Following Friday’s announcement of the “Tidö-deal” by the majority parties Moderates, Christian Democrats, Liberals and Sweden Democrats, Moderate leader Ulf Kristersson will face the PM vote today at 11.00. As he is backed by a (slim) majority of mandates, any dissenters would make it a close call, but best guess is that he wins the vote.