Markets
Markets finished last week in a classical risk-off setting. This morning in Asian trading, there were tentative signs that the risk-off could slow. However, European markets almost immediately returned to last week’s habits. Mounting risks with respect to the Russia-Ukraine conflict and markets pondering what path the Fed will outline on more aggressive and faster policy normalization later this week continue to haunt investors in riskier assets. Selling in the EuroStoxx 50 accelerated after the index last week dropped below the 4231 neckline. The Euro zone January PMI showed a mixed picture. The headline composite index eased for the second consecutive month from 53.3 to 52.4, slightly lower than expected. The spread of the omicron variant according to Markit took an increasing toll on the region’s economy. Especially activity in the services sector slowed (from 53.1 to 52.1). Even so, Markit still denominates the setback due to omicron as rather muted. On the other hand, alleviating supply chain delays provided a welcome support to manufacturing (59.0 from 58.0). Average selling prices across in both manufacturing and services matched the survey’s historic all-time high. At the same time, input prices in manufacturing show signs of cooling raw material costs. Regarding individual countries, activity in Germany surprisingly accelerated from 49.9 to 54.3 (composite) with both manufacturing and services improving. Still, the data weren’t able to change a downbeat investor mood. Selling on equity markets even gain traction when US traders got involved. The EuroStoxx 50 is losing 3.75%. US indices show open with additional losses of up to 2.30% (Nasdaq). The risk-off is keeping core bond markets better bid despite expectations for faster Fed tightening. US yields decline with the belly (5 & 10-y declining >4 bps) outperforming the wings (2.5 bps and 1.6 bp for the 30-y and 2-y respectively). German yields are ceding 3.5/4.0 bps across the curve. The 10-y yield is revisiting the -0.10% support area. Until now intra-EMU spreads are little affected by the global risk-off trade. This also applies to Italy, where the Parliament is will decide whether premier Draghi will be appointed as President (10-y Italian spread vs Germany 1 bp wider, in line with the rest of Europe). After opening stronger Brent crude oil also eases off recent cycle highs currently trading in the mid $ 86 area.
FX markets don’t fully return to a standard risk-off reaction function. The yen outperformed early in European dealings but the dollar easily restored the balance with USD/JPY currently even trading in positive territory (113.90). The DXY trade-weighted index jumped back above 96. The euro suffers. Near 1.13, EUR/USD is at risk of falling below a STupward sloping trend channel. The Swiss franc initially was the preferred European safe haven. EUR/CHF tested the 1.03 big figure, but rebounded. Is the SNB (finally) coming to the fore? CE currencies (CZK, and even more PLN and HUF) all face growing headwinds despite expectations for more interest rate support.
News Headlines
Polish (real) retail sales rose by 14.8% M/M and 8% Y/Y in December, falling somewhat short of consensus (14.9% M/M and 9.6% Y/Y). The largest increase came from textiles, clothing and footwear sales. After eliminating for seasonal factors, retail sales at constant prices in December 2021 were 3.4% lower in comparison to November 2021. The Polish zloty lost significant ground today, but that’s mainly due to the risk-off market environment. Hawkish comments by NBP governor Glapinski over the weekend can’t fight that context. EUR/PLN surges from 4.53 to 4.56+.
The January UK composite PMI unexpectedly fell from 53.6 to 53.4 while consensus expected an increase to 54. Both manufacturing (57.9 to 56.9) and services (53.6 to 53.3) indices declined and came in below forecasts. The Omicron wave meant a third steep downturn for the hospitality sector, but this one should be brief with restrictions now easing. Business confidence in the outlook picked up, driving sustained solid jobs growth. Inflationary pressures remain elevated at near-record levels, boosting the probability of follow-up BoE rate hikes. EUR/GBP again tested 0.8381 resistance in today’s hostile risk environment.
