Market movers today
- After an unusually busy week on the central bank front, today is set to be quieter in terms of scheduled releases. That said, there will be plenty of market developments to look out for especially given yesterday’s shift towards reflation-sensitive assets (see below).
- Today’s key releases include the German IFO survey and US new home sales.
- Fed Chair Jerome Powell and Fed Vice Chair Richard Clarida are also speaking today.
- Besides that we continue to follow the development in China with Evergrande.
- We do not expect the weekend’s general election in Germany to be a major market mover.
The 60 second overview
Markets and reflation: Yesterday’s session was characterised by a sharp steepening of global yield curves and subsequent performance of the typical value and reflation sensitive assets in energy, industrial, materials and financials. The broad USD weakened, commodities gained and inflation expectations moved higher on both sides of the Atlantic. In our view, the sudden performance of reflation trades should be seen in light of Wednesday’s FOMC meeting where the Fed clearly signalled forthcoming tightening of monetary conditions via both tapering and interest hikes next year, see Fed Research – Review: Fed is about to start a tightening cycle, 22 September. For the same reasons we are also a little sceptical on how long this can run as tighter global monetary conditions amid a global manufacturing slowdown often constitute an investment environment of heightened drawdown risk.
Norges Bank: Yesterday Norges Bank hiked policy rates by 25bp lifting the sight deposit rate from the COVID-19 induced 17 months at zero. This makes Norges Bank the first G10 central bank to hike policy rates amid the global recovery. Norges Bank is also very likely to deliver the second hike among G10 central banks as guidance from the Executive Board pointed to December as the timing of the next rate hike. Overall, the Norwegian central bank signals 4 additional hikes by end-2022 and a total of 6 hikes by end-2024.
Evergrande: The last week has been dominated by fears of a Lehman-style default event out of China from its second biggest property developer. Over the last days big global banks have all assured investors that their risk is not material. That leaves some uncertainty as to who actually sits with the exposure in case of default but the market narrative is that most of the liabilities are held by domestic firms. Overall, we expect the turmoil related to Evergrande to get worse before it gets better. But we believe the Chinese government will eventually intervene as the alternative could be a financial crisis with very severe effects on the Chinese economy and the Chinese people, for more details see Research China – The Evergrande situation and what we expect, 21 September. Short-term markets will look for any comments from Evergrande on the USD-denominated interest payment that was due yesterday.
Turkey: In a highly surprising move the central bank of Turkey yesterday cut policy rates by 100bp brining the one week repo rate to 18%. It has long been known how President Erdogan has put pressure on the central bank to ease monetary conditions despite high inflation with the core measure currently at 17% Y/Y. Yesterday’s decision challenges the central bank’s independence and lead to a sharp FX market sell-off in TRY.
Equities: Equity markets resumed the rebound rally on Thursday. Cyclicals beat defensives and value vs growth, although gains was broad based with most sectors and styles in green. Energy led the market, followed by financials, materials and industrials. Defensives were the worst performers with bond proxies the only decliners. In total, S&P500 1.2%, Dow 1.5%, Nasdaq 1% and Russell 2000 1.8%. VIX fell south of 20. Asian markets are more mixed this morning after Evergrande appears to have missed the crucial interest payment deadline. US futures roughly unchanged, suggesting that the rebound rally could be over as well.
FI: Fixed income markets had a tough day yesterday as they were digesting the FOMC decision from Wednesday night, and subsequently the BoE meeting yesterday. The long end in US led the sell-off by 12bp with 10y UST reaching 1.42%. In Europe 10y Bunds rose almost 7bp to -0.26%, a highest level since mid-July. The front end only suffered a minor loss of just 2bp. The weaker than expected PMIs did not materially lead to a sustainable rally in bonds. Also the positive headlines of Evergrande also contributed to higher yields. Intra-euro area spreads to Bunds tightening across the board lead by the periphery.
FX: Both EUR/NOK and EUR/GBP moved lower on hawkish messages from Norges Bank and the Bank of England, respectively, but as importantly also the boost to global reflation-assets. EUR/USD moved back above 1.17.
Credit: Credit markets remained positive yesterday and iTraxx Xover tightened 3bp (taking it to 239bp) and Main 1bp (to 48.5bp). HY bonds tightened around 1bp and IG 0.5bp.
