Market movers today
- Overnight, we will get the Caixin services PMI from China. Keep in mind that the official PMIs released over the weekend signalled a slower growth and continued supply chain bottlenecks.
The 60 second overview
Happy days: Looking back just a few weeks, markets were well in turmoil. But having gone through most of the earnings season, it now looks like markets have shifted back into a fairly benign risk sentiment. For example, value, small caps, energy and banks did well yesterday, as e.g. US small caps (Russel 2000) rose 2.7%, to a 2021-high and so far, (rapidly) rising interest rates appear to be less of an issue. In FX however, there is a small bias towards dollar strength in some crosses (mostly versus the EUR).
Monthly Executive Briefing: Both US and euro area GDP remain below the pre-COVID trend path, inflation remains high and central banks are under pressure to act. See more in Monthly Executive Briefing – More pressure on central banks (1. November). This week, the market will remain focused on the FOMC meeting and Friday’s payrolls.
UK: The Bank of England (BoE) meeting on Thursday 4 November is going to be a key market mover. What was unthinkable in the beginning of the year, is now a real possibility. Will the BoE raise the Bank Rate or not? Investors have more or less fully priced in a 15bp rate hike while economists are evenly divided between unchanged and a 15bp rate hike. The sudden hawkish shift in September was a major driver of higher yields also in Europe, so BoE’s policy decision is also going to be interesting from a broader market perspective., see more in UK Research – Bank of England Preview: Unchanged or dovish rate hike (1. November).
RBA: The Reserve Bank of Australia maintained the cash rate unchanged at 0.10%, but dropped the April 2024 0.10% yield cap, which was not a surprise given that they failed to defend the target already last week. While this effectively opens up the door for a rate hike before 2024, the overall message was still dovish. RBA acknowledges the risk of higher inflation and tighter-than-expected labor markets, but expects inflation to remain moderate as wages are only seen rising moderately over the coming years. AUD weakened following the release, and markets slightly pulled back on the rate hike expectations, but the current pricing of three hikes in 2022 still appears too aggressive in our view.
Equities: The week started on a solid note and US logging fresh records. Despite volatility in yields eased, value was the preference for the day, with energy the standout. US markets all higher with S&P 500 0.2%, Dow 0.3% and Nasdaq 0.6% but Russell 2000 jumping 2.7%. Sentiment is more varied this morning, with Asian markets mixed and US futures a notch lower.
FI: It was again a volatile day in the bond markets as shown by the intra-day move in 10Y Treasuries and the 10Y spread between Italy and Germany. Initially, 10Y Treasury yields rose by almost 5bp from 1.55% to 1.6% before ending the day at 1.55%. The spread between 10Y Italy and 10Y Germany initially widened with 10-11bp but in the afternoon Italy performs and the spread ends 4-5bp wider. However, the 10Y BTPS-Bund spread has still widened some 20bp after the ECB meeting last week.
FX: EUR/SEK continues to trade on a heavy note.
Credit: Credit markets remained soft yesterday where iTraxx Xover widened 0.7bp and Main 0.1bp. HY bonds closed 1bp wider and IG 0.5bp wider.
