Market movers today
Markets will continue to digest yesterday’s FOMC message and watch out for Russia-Ukraine headlines, amid a light data calendar in Europe.
US Q4 21 GDP figures are released and we expect them to show that the economic recovery continued at the end of 2021, despite the new COVID-19 wave. The weekly initial jobless claims will also be monitored for COVID-19 effects on the labour market, after claims had increased in recent weeks.
The 60 second overview
Hawkish message from Powell: As expected, the Fed hinted that it will hike for the first time at the next meeting in March. Fed Chair Jerome Powell was quite hawkish during the press conference, which drove US yields higher, EUR/USD lower and US equities lower. Powell spent a lot of time discussing upside risks to inflation and simultaneously arguing that the Fed is now at maximum employment. The Fed needs to tighten financial conditions further to put an end to the very strong inflation narrative among consumers, businesses, investors and in the media and hence we modify our Fed call now expect five rate hikes this year, up from four previously. We still see risks tilted towards even more rate hikes. We discuss in details in Fed Research: Review – Every meeting is “live” – we now expect five hikes this year, 26 January.
Russia-Ukraine standoff: US delivered the written response to Russian security demands yesterday, but unsurprisingly, it did not commit to Russia’s key demand of stopping NATO’s expansion towards east. NATO maintains its ‘open-doors’ policy, but US Secretary of State Blinken noted that west is ready to discuss other options, such as arms control, to find a diplomatic solution to the crisis. On the positive side of news, Russia held talks together with Ukraine, France and Germany yesterday, signalling willingness to negotiate. Market sentiment remains cautious as sanction risks loom, with USD/RUB rising just below 80 and Brent oil briefly touching USD90/bbl before the hawkish FOMC yesterday.
Denmark lifts all restrictions: As expected, the Danish government announced that restrictions are not extended beyond Tuesday 1 February so all restrictions are removed next week (except a few for international travellers and nursing home). Normally, it would not be a major story but Denmark is definitely one of the frontrunners globally and we expect more countries to follow suit soon, as many countries seem to be looking towards Denmark (as data quality is quite good due to a lot of testing and sequencing). This supports our view that we are moving towards normalisation in many countries despite record-high new cases. We are shifting from the pandemic phase to the endemic phase due to vaccines, better treatments, better know-how and the milder omicron variant. We are still of the view that governments will avoid re-imposing restrictions next season.
Bank of Canada: In contrast to the Fed hawkishness, Bank of Canada decided to maintain rates unchanged yesterday despite market expecting a 25bp hike. That being said, BoC assessed that the economic slack has now been mostly absorbed, and we continue to expect the first rate hike in March.
Equities: Equities went from rebound to declines as Powell reiterated the hawkish message. S&P 500 closed down -0.2%, Nasdaq unchanged, Dow -0.4% and small cap Russell 2000 continues to underperform, down -1.4%. Very varied sector performance between value and growth, with both tech and banks among the better groups. Similarly, no clear direction between defensives or cyclicals, but both industrials, staples and real estate sold off in a tight range. So, risk appetite seems appeared mixed, however VIX continuing higher (south of 30) suggest that risk off continue to build in markets. Similarly, Asian markets are in broad declines this morning with Japan and China correcting -3%. US futures suggest markets will open 1-2% lower.
FI: There was a solid negative market reaction on the back of the FOMC meeting as 2Y Treasury yields rose 16bp and 10Y Treasury yields rose a 6bp. Hence, the flattening of the US curve continues as we have seen so many times in the past when the Federal Reserve are about to embark on a hiking cycle. There is plenty of room for a further flattening, and given the comments from Powell that he could hike at every meeting, then the Federal Reserve step up even more compared to what is priced in currently (some 100bp), and this will maintain the curve flattening.
FX: Fed Chair Jerome Powell was quite hawkish during the press conference, which drove US yields higher, EUR/USD lower and US equities lower. We continue to see EUR/USD at 1.08 and expect dollar strength to broaden against other currencies during H1.
Credit: Credit markets were in a positive mood yesterday where iTraxx Xover tightened 6bp (to 271bp) and Main 1.3bp (to 55.8bp). HY bonds tightened 6bp and IG 0.5bp.
