Market movers today
- Friday’s highlight will be the October flash PMIs. In euro area, last month’s PMIs showed increasing evidence that supply constraints have started to weigh on demand, with new order growth slowing and year-ahead expectations dimming. Focus will be whether this trend continues and how much additional headwind firms expect from Europe’s mounting energy crunch.
- For the US Markit PMIs, consensus expects further moderation in manufacturing activity, while marginal improvement is foreseen in the service sector.
- The Central Bank of Russia will announce their rate decision at 12:30 CET. We expect them to continue their tightening cycle by hiking another 25bp to 7.0%, in line with market consensus. RUB has outperformed in the EM space over the last month, also supported by the rising oil and gas prices.
- Finally, keep an eye on potential rating updates from S&P on Italy and Greece, and from Fitch on Finland, Netherlands and Austria.
The 60 second overview
The demand for inflation protection remains strong as shown by the demand for the 5Y US inflation linked bonds seen at yesterday’s auction of 5Y US TIPS and the continued widening of the US break-even inflation rate, where the 5Y BEI-rate is now close to a historical high of 3%.
In the UK, the Bank of England Chief Economist stated in an interview with FT, that the decision to raise interest rates at the MPC meeting next month was “live” and “finely balanced,”. However, he also indicated that the monetary policy in the future does not need to be very restrictive. A rate hike next month is priced in, but the comments of future hikes may dampen the expectations on the future policy path.
In the Chinese market Evergrande bounced back as they made an interest payment before the week-end deadline and thus avoided a default. Hence, the Asian stock markets rose this morning.
Equities: Thursday saw relatively minor moves, but enough for S&P to cap its seventh straight gain and close at a fresh all-time high. The inflation trade reversed, with energy, materials and financials under pressure and growth outperforming. S&P500 closed in at 0.3%, Nasdaq 0.6%, Dow unchanged and Russell 2000 0.3%. Asian markets are following this morning driven by tech and real estate after rumours that Evergrande has made an interest payment. US futures little changed.
FI: The range trading continues in the bond market with 10Y US Treasuries trading around the 1.60% to 1.70%. Furthermore, the demand for linkers continues to be strong as the 5Y spread between US inflation linked bonds and US Treasuries widened to historical high of almost 3% even though US Treasury department sold USD 16bn in 5Y linkers yesterday.
FX: Overview: Overall yesterday’s session in FX markets proved rather uneventful albeit characterised by USD gaining on the rise in USD rates. EUR/SEK, EUR/NOK and EUR/GBP were all little changed.
Credit: CDS indices followed European equities in red while cash bonds were steady. X-over widened 3.4bp while Main widened 0.2bp wider. HY bonds closed 0.5bp wider and IG was unchanged.
