Market movers today
In a fairly thin data calendar today, the big event of the day is the Bank of Canada monetary policy announcement this afternoon. Markets and analysts are roughly evenly split between a 75bp and a 50bp hike. As our base case we pencil in a 50bp hike alongside a final 25bp hike in December.
In the US we get new home sales which should get some attention as historically it has tended to co-vary with unemployment rates.
The 60 second overview
Markets: sentiment remains fragile and nervous as evident from the daily volatility and considerable market moves across asset classes. Yesterday’s session was dominated by a fall in US rates following worse-than-expected consumer confidence data and not least US house prices. The housing markets is increasingly getting attention as the surge in mortgage rates seems likely to drag the housing market lower and at some point contribute to higher unemployment rates. More air in the labour market seems like a necessary condition for Fed to slow its tightening pace and markets put a higher probability of an earlier pivot following yesterday’s releases.
The move lower in yields was most pronounced in longer-dated yields driving a flattening and further inversion of most parts of the USD-curve. The USD exchange rate weakened, real rates moved lower and equities paradoxically implicitly rallied on the weaker bunch of data. This morning most Asian equity indices are trading in green while US equity futures are solidly in red following a few prominent disappointing earnings reports out post yesterday’s stock market close.
UK Politics: The new PM Rishi Sunak yesterday announced his cabinet which marked a comeback to several former ministers. While markets had already reacted positively to news that Sunak would keep Jeremy Hunt as his Chancellor of the Exchequer it was a slightly negative surprise that Sunak could not confirm that a fiscal strategy will still be presented on 31 October. Fiscal clarity is crucial ahead of the 3 November Bank of England meeting. Over the last month the outlook for more fiscal prudence in the UK has driven a repricing of the short-end with the peak in policy rate pricing having gone from 6.25% to 4.95% by next summer.
Danmarks Nationalbank: We think it is a 70/30 call if tomorrow Danmarks Nationalbank (DN) will decide to hike policy rates by 10bp less than the ECB as a response to recent DKK strength and FX intervention selling. Markets seem 50/50 evenly split. Either way, we look for a small reaction in EUR/DKK. If we are right, we expect a rise to at most a level of around 7.4420-30. If we are wrong, and DN follows ECB 1:1, we look for the cross to drop back to the 7.4363 floor which would likely maintain market speculations of a smaller Danish rate hike compared to the ECB in December.
Equities: Equities were higher yesterday although macro data were weak and hence the tendency that “bad data is good data” continues as long as yields are dropping. Most sectors lifted with energy left behind. Advances were driven by cyclicals, growth and small caps with VIX dropping 1.5 points to just north of 28. Weak earnings results coming in mostly after the bell in US and hence more reflected in the futures today and not the cash performance yesterday. In US yesterday, Dow +1.1%, S&P 500 +1.6%, Nasdaq +2.3% and Russell 2000 +2.7%. Asian markets are higher this morning while US futures, especially tech are lower this morning.
FI: It was another day with big moves in the global bond markets as the bond market rallied massively from the long end of the curve. 10Y US Treasury yields declined by 16bp yesterday and the 2Y-10Y curve flattened by 14bp as house prices declined. The German 10Y yield fell by 16bp and curve flattened as well ahead of the ECB meeting on Thursday.
FX: USD traded poorly yesterday vs G10. EUR/USD made a sharp move higher, breached 0.99 and challenged parity before dropping back toward the mid-0.99s. Triggers were seen in US data that pulled rates lower under bull-flattening and bolstered equities and thus overall risk sentiment. Cable gained and is back above 1.14 after the appointment of Rishi Sunak. Scandies were also among the winners with both EUR/NOK and EUR/SEK on the defensive, the latter dropped close to 10 figures.
Credit: Credit markets continued in a good mood on Tuesday as the relief rally in risky assets continued. Itrax main tightened 5.1bp to close at 116.5bp while Itrax Xover tightened 17.7bp to close at 567.7bp. Tuesday also saw decent primary activity, with both financials and corporates testing the waters.
