(Jens Peter Sørensen – Danske Bank A/S)
Market movers today
- There are no significant market movers today.
- The Chinese central bank unexpectedly cut policy rates this morning.
- The key numbers and events are the German ZEW indicator tomorrow, UK inflation data and Fed minutes later this week.
The 60 second overview
The Chinese central bank unexpectedly cut rates this morning as it lowered its one-year policy loans by 10bp and the 7-day reverse repo rate to 2% from 2.1%. They were expected to keep rates unchanged. The rate cut comes on the back of a slowdown in the Chinese economy.
The focus on a recession in the euro-area continues and the risk of a recession is seen as 60% according to a recent poll conducted by Bloomberg. This is the highest since November 2020. It is driven by a string of factors but primarily by energy shortages that threaten to push inflation even higher, but also the drought and rising monetary policy rates. All this drives the cost-of-living higher and increases the risk of a recession.
The UK inflation numbers are one of the highlights of the week as inflation is expected to hit 9.8%. We also have Fed minutes from the latest FOMC meeting where we will look for comments on future path for monetary policy. A string of Fed officials have stated that we are still far from easing and declare victory over inflation. Tomorrow is the release of the German ZEW indicator. Here the number will most likely show a reflection of the increased risk of recession.
Equities: Global equities rallied Friday and thereby closing yet another strong week with gains around 2.5%. VIX drifted lower to sub 20 and most of the down-beaten stocks in first half of the year continue to regain some the loss to the winners of H1. As the rally on Friday was (again) driven by an inflation-related relief, this time coming from lower consumer based inflation expectations in the Michigan survey, it resulted in the bucket of cyclical growth and quality companies outperforming together with small caps. In US Dow +1.3%, S&P 500 +1.7%, Nasdaq +2.1% and Russell 2000 +2.1%. Asian markets are higher this morning with the Nikkei 225 getting back into green for the year. China is lagging the rally after a weak set of key figures and with retail sales coming in very weak. European futures are higher in a Friday catch-up while US futures a tad lower this morning.
FI: The flattening of the US yield curve continued on Friday after a very brief bearish steepening of the 2-10Y curve on Thursday last week. There has also been some relief in the Bund ASW-spread as it has declined from 95bp down towards 90bp. We still believe that the German government bond yield curve will continue to flatten as we have seen in the US yield curve. The ASW-spread can also continue to widen even at these elevated levels.
FX: EUR/SEK rebounded above 10.40 after the surprise drop in Swedish inflation on Friday. EUR/NOK stayed put around the 9.80 level. EUR/USD edged below 1.03 to finish the week.
Credit: Credit markets saw further tightening on Friday as iTraxx Main was tighter by 2bp and Crossover by 16bp, with the indices ending the week tighter by 10bp and 56bp, respectively (at 92bp and 463bp).