Market movers today
- The week kicks off with some key data releases overnight from China. Consensus expects the data on industrial production, investments, and Q3 GDP to broadly reflect a slowdown in economic activity, while retail sales is expected to stabilise after the disappointing August print. Otherwise, it is a quiet start to the week with only manufacturing and industrial production data and the NAHB housing index due in the US.
- Markets are still watching closely for any news coming from the heated oil and gas market or from China.
- In the US, this is the last week where the Fed members can guide markets before the blackout period kicks in on Saturday 23 October. Monday’s speakers, Quarles and Kashkari, are considered to be in neutral and dovish camps.
- Later in the week, we will get the final September HICP data on the euro area as well as the UK inflation print for September on Wednesday.
- On Friday, focus turns to preliminary October PMIs for the UK, the US, Japan and the euro area.
The 60 second overview
On Friday, the risk sentiment was positive across the major markets, supported by strong US retail sales and so far also decent earnings reports. This morning, the Asian session has been challenged by yet another surge in energy prices that put inflation yet again at the centre of attention. Furthermore, Chinese GDP figures disappointed market expectations by only 0.2% growth qoq (vs. 0.4% qoq expected).
German politics: In Germany, SPD, Greens and FDP formally agreed to enter talks for a ‘traffic light’ coalition. While talks will continue in the coming weeks (and months), open questions abound, particularly on the financing part of any big green investment package. The parties seemingly agreed that the constitutional ‘debt brake’ will apply again in 2023, but at the same time also ruled out tax hikes. Also important from an inflation perspective, the coalition plans to introduce a 25% increase in the minimum wage to EUR 12/h, although the timing remains uncertain.
China: Yesterday, the PBOC was out saying that the risks stemming from Evergrande can still be ‘contained’. This happens amid financial stress in China still expected to get worse before it gets better, but we believe we are close to the ‘peak stress’ level in China. Peak stress could give a short-term lift to Chinese equities but we do not see a sustained move higher until the credit cycle turns. That is still some time away. For assets indirectly linked to China, the negative spill-over from the Chinese economic slowdown is yet to be felt, see more in Strategy – China closer to ‘peak stress’.
Equities: Buy the dip was the name of the game last week. Investors picked up more than half of the September drop, with MSCI World a meagre -2% off its all-time highs. Friday was no exception, as equity markets were higher across the board. In the US, S&P 500 closed up 0.8%, Nasdaq 0.5%, Dow 1.1% but Russell 2000 -0.4%. Risk-on visible in sector performance as well. Cyclicals the clear outperformers, with industrials, consumer discretionary and banks at the top. This appears to be lingering into this week as well with US futures pointing sharply higher. Opposite moves in Asia though, partly driven by a negative GDP surprise from China.
FI: On Friday, volatility was more muted than previous days, with EGB yields ending slightly higher on the day supported by solid US retail sales. The bearish steepener on the back of the positive risk sentiment came after a significant repricing the previous days. 10s30 EUR swap steepened 2bp after flattening 17bp since Tuesday.
FX: Price action in FX markets have over the last week been heavily characterised by strong performance of commodity-sensitive currencies e.g. AUD, MXN, NZD and ZAR and where central banks have room to hike (irrespective of the central bank’s communication). Also in the Scandies both SEK and NOK have faired strongly with EUR/NOK and EUR/SEK breaking below important support levels. EUR/USD still seems to struggle to break through 1.16.
Credit: Cash bonds performed well on Friday while CDS indices took a slight breather. Xover closed unchanged in 256bp while Main tightened 0.4bp to 50.4bp. HY bonds tightened 2.5bp and IG 0.5bp.
