Market movers today
- The ZEW Indicator of Economic Sentiment for the German economy is expected to show more optimism among analysts about current prospects of the German economy, while the uncertainty from COVID-19 virus mutations may temper the expectations component of the index.
- Fed’s Mester (voter, hawkish) speaks at 16:00 CET. Following the calls for tapering from other Fed members Bostic and Rosengren yesterday, it will be interesting to see whether Mester repeats the message today.
- The House of Representatives of the US Congress may approve the USD 1 trillion infrastructure package, which would leave it to President Biden to sign it into law.
The 60 second overview
Fed: Last night Atlanta Fed President Raphael Bostic argued that the Fed should start tapering if we see another month or two of strong employment growth, as it would fulfill the “substantial progress” Fed goal. Bostic also argued for swift and faster tapering compared to past episodes, which should pave the way for a for a rate hike ‘very late 2022″. Fed’s Rosengreen said yesterday in an AP interview that Fed should announce that it will start tapering at the September FOMC.
Higher yields: The Fed comments weighed on US treasuries and 10Y yield rose above 1.30 % for the first time since mid-July. In respect of the timing of the first-rate hike the market is pricing the first full hike in Q1 2023. We look for a September tapering announcement and the first-rate hike in Q4 2022.
Commodity prices under pressure: Oil prices have stabilized over night after falling more than 6% from the peak over the last two trading days. The rapid spread of the Deltas-variant is spooking traders. Especially, the resurgence of the virus and travel restrictions in China is seen as a threat to the demand outlook. The number of airline seats being offered in China dropped 32% last week as new travel bans were enacted. On top of the travel restrictions there is a growing concern that the Chinese vaccines Sinopharm and Sinovac are less effective against the Delta variant.
IPCC report: Yesterday, the UN Intergovernmental Panel on Climate Change published its sixth report on global warming. The report says that the world is likely to reach 1.5C of warming within 20 years even in a best-case scenario. The report also forecast further extreme weather events. The report will form the basis for the discussions at the COP26 UN Climate Change Conference in November in Glasgow.
Equities: Equities saw a slow start to the week. Moves were modest, but generally in favour of yield-sensitive banks and defensives. Bond proxy sectors like utilities and real estate, as well as cyclicals sold off. Energy the big decliner though with a continued selling pressure in oil. VIX snapped its four-day strike of declines and picked up slightly. In the US, Dow -0.3%, S&P 500 -0.1%, Nasdaq up 0.2% and Russell 2000 -0.6%. The mixed setting is continuing in Asia this morning, while US futures point to a small setback.
FI: Yesterday’s EGB price action ended with broadly unchanged levels from Friday’s close. Periphery recorded some outperformance of 2bp in the general flattening move we saw yesterday. Weidmann’s comments from Welt on Sunday laying out the sequence of first ending PEPP, then APP, and then raise rates was highlighted in markets, but market did not seem to trade on it as it should be well understood already.
FX: USD and JPY gained vis-à-vis Scandies and CHF yesterday driven by higher US interest rates and falling commodity prices. EUR/USD sustained the move below 1.18 from last week and USD/JPY traded close to 110.
Credit: Sentiment was a bit downbeat yesterday in credit. iTraxx Xover widened 2bp (to 233½bp) and Main closed in 46½bp (+0.4bp). HY bonds widened 2bp and IG 1bp.
