Markets
Yesterday, investor confidence faded throughout the day and finally resulted even in a standard risk-off repositioning. A positive risk sentiment in Asia encouraged by the outlook for further PBOC easing initially only modestly inspired European investors. US equities tried to do better despite mixed US data, including an unexpected jump in US weekly jobless claims as omicron dented activity (286k vs 231k expected). Initial US equity gains of 1.5%/2.0% apparently were seen as an opportunity to further offload risk. European indices ended near best levels of the day (EuroStoxx +0.73%). However, a late session US sell-off resulted in losses of up to 1.30%.
The risk-off this time also supported a (temporary?) change the dynamics on the bond markets. Of late, bond sales/higher rates in anticipation of accelerated Fed rate hikes weighted in risky assets. Yesterday, some investors apparently concluded that US yields had risen enough for bonds to retake their safe haven role. US yields and the end of the day declined between 3.2 bps (2-y) and 6 bps (5 & 10-y). The move was more or less equally divided between real yields and inflation expectations. A setback in oil prices didn’t help to support sentiment. European yields ended with modest losses between 0.7 bps (2-y) and 2.1 bps (30-y).
The accounts of the December ECB policy meeting showed some (hawkish) members made reservations both on the ECB’s assessment of inflation as well as on the proposed package with respect to monetary policy. Even so, it doesn’t look that the hawks had the leverage to profoundly alter the ECB’s anti-inflation strategy anytime soon.
On the FX market, the dollar initially showed no clear trend. However, at the of US dealings FX also returned to a ‘standard’ risk-off move. The yen slightly outperformed the dollar (USD/JPY close at 114.11). At the same time DXY rebounded to close at 95.73. EUR/USD drifted further south in the 1.13 big figure (close 1.1312). Sterling initially traded strong with EUR/GBP setting a new cycle low, but the UK currency returned some of its gains in the late session repositioning (close EUR/GBP 0.8317).Yesterday’s late session setback in the US is spilling over to Asia this morning with regional indices losing up to 2.%+ (Australia). Core (US) yields continue their decline. At the same time, the dollar fails to extend yesterday’s rebound. (EUR/USD 1.133, USD/JPY 113.85).
The eco calendar is thin with only the EC consumer confidence scheduled for release. Risk sentiment will continue to set the tone for trading going into the weekend. We don’t see a trigger for a short-term improvement. Markets will also keep a close eye at the meeting between US Secretary of State Blinken and the Russian Foreign minister Lavrov in Geneva. However, there are currently few signs that tensions on Ukraine will ease anytime soon.
The US 10-y yield is retesting the 1.77%/1.80% previous resistance. A break would hint on a further rebound in core bonds. The dollar takes a poor start this morning, but in a daily perspective, we give the US currency the benefit of the doubt.
UK retail sales this morning were materially weaker than expected (-3.7% M/M). Together with a poor risk sentiment, this probably caps further sterling gains in a daily perspective.
News Headlines
Japanese inflation quickened from 0.6% to 0.8% y/y in December last year. Core measures stabilized at 0.5% (excluding food) or even eased to -0.7% (excluding food and energy), suggesting broadening price pressures remain limited for the time being. The outcome pours additional cold water over BoJ rate hike speculation triggered by a Reuters report last week. While the central bank earlier this week did change its assessment of inflation risks to balanced, governor Kuroda later added that the start of policy normalization is “absolutely not” on the table. The Japanese yen gains this morning though that’s solely the result of Asian risk-off. USD/JPY trades at 113.82.UK GfK consumer confidence unexpectedly declined from -15 to -19 in January, the lowest level since the lockdowns in early 2021. Confidence in the economy one year ahead fell from -24 to -32. A three-point drop from 1 to -2 (the lowest since November 2020) reflected growing concerns over personal finances over the next 12 months. Saving intentions hover near the 2021 lows. GfK’s Staton explained consumers are “clearly bracing themselves for surging inflation, rising fuel bills and the prospect of interest rate rises”, suggesting the cost-of-living crisis took was now the major concern instead of the pandemic.
