Markets
Friday’s panic Omicron-driven risk-off repositioning evidently was the result of heightened uncertainty with respect to yet a another turn in the never-ending corona saga, but it was also a trigger to rebalance some ‘unidirectional’ market positioning, like in EUR/USD. Short-term US yields probably also discounted quite a positive scenario on accelerated tapering and early Fed rate hikes. There was room for profit taking. Idem for equities. Investors now have to look through the fog of first Omicron headlines and try to assess the impact on growth and policy. Uncertainty on Omicron might give activity data some more weight, especially in Europe as governments were already forced to take new containment measures. Still, today and tomorrow, ‘pre-Omicron’ inflation data also have a role to play. Preliminary German inflation again beat expectations by quite a big margin. HICP inflation jumped 0.3% M/M putting prices 6.0% higher compared to November last year. Already before the data release, German ECB Member Schnabel indicated that the November report might mark a peak. Other members (De Cos) also repeated the ECB mantra on the temporary nature of inflation. ECB’s Villeroy at the same time said Omicron won’t change the economic outlook too much. The ECB will need quite some luck for both growth and inflation to return to the hoped for path. The policy dilemma for the December meeting only deepens. At least for now, the rebound in European yields stays modest given last week’s sharp decline. German yields are rising between 1.5 bps (2-y) and 3.5 bps (5 & 10-y). The 10-y German yield is still struggling to regain -0.30%. Intra-EMU spreads narrow marginally. US yields clearly show more rebound flexibility rising between 4 bps (2-y) and 8.5 bps (10-y). At 1.56% for the US 10-y yield, the cycle top/resistance at 1.70% is quite some distance away, but the technical picture isn’t hurt in a profound way. European equites regain 1.50%. US stock markets open about 1.0/1.5% higher. Especially for European markets, this isn’t enough yet to a assume an new buy-on-dip episode.
The dollar still proves more sensitive to (potential) interest rate support rather than to follow the ‘classic’ risk-on/risk-off paradigm. DXY rebounds to 96.35. The peak just below 97 remains within reach. The yen, but also the euro, ‘suffer’ from the risk-on, annex rewidening of the interest rate differential. USD/JPY trades near 113.80. The EUR/USD picture remains fragile. Friday’s short-squeeze apparently was a selling opportunity. The journey north of 1.13 was short-lived. At 1.1265 the focus returns to downside support in the 1.12/1.1185 area. CE currencies, after a turbulent week, enter calmer waters. The risk-on rebound for now outweighs higher core yields and a strong dollar. (EUR/PLN 4.69; EUR/HUF 368 & EURCZK 25.59). Even so, especial the zloty and the forint need close monitoring (and probably persistent CB assistance). Sterling’s performance is unconvincing even against the euro (EUR/GBP 0.8470). News Headlines
Belgian inflation accelerated from 4.16% Y/Y to 5.64% Y/Y in November, which is the highest level since July 2008. Inflation rose by 1.25% on a monthly basis. The large increase in inflation this month is due, as in recent months, to the sharp rise in energy prices. Energy currently has an inflation rate of 46.4% and contributes 3.92 percentage points to the total inflation. Core inflation stood at 2.14% Y/Y compared to 1.95% Y/Y in October. German inflation accelerated as well and beat consensus: 6% Y/Y from 4.6% Y/Y (vs 5.5% expected). Spanish inflation rose by 0.3% M/M and 5.6% Y/Y. The EMU figure will be published tomorrow with today’s readings pointing to upward risks to the 4.5% Y/Y headline consensus (which would be an EMU record high).
EUR/TRY rises back above the 14 handle after Turkish President Erdogan said that he will never defend interest rate hikes nor compromise on the issue. The Turkish central bank the past months bowed to his demands, slashing rates by a cumulative 400 bps to 15% despite inflation accelerating to 20% Y/Y. Over the weekend, the Turkish President ordered an investigation into possible FX manipulation after the lira’s recent crash. The State Supervisory Council has been asked to identify those institutions that bought large amounts of foreign currency.
