Markets
A Pfizer announcement yesterday dominated trading. The company said that three doses of its vaccine neutralized omicron, easing fears further that the highly infectious strain would derail the economic recovery. The news abruptly halted an intraday rise in core bonds to send them off a cliff. German yields surged 2.5 bps (2y) to 7.7 bps (30y) higher. US yields changed from -1 bp (2y) over +4.7 bps (10y) to 9 bps (30y). The $36bn 10y auction went smooth. The Bund’s short end underperformance helped EUR/USD higher. The currency pair went beyond the 1.129 level (61.8% dollar recovery of the 03/20-01/21 EUR/USD uptrend) to meet resistance from the downward sloping trendline at 1.1343. The trade-weighted DXY returned to the 96 barrier. The Japanese yen lost quite some ground on the rise in core bond yields, in particular against the euro. The Swiss franc on the other hand was remarkably resilient. European stocks closing 1% lower compared to gains up to 0.6% on WS was equally striking. Both the Swiss franc and European equities may have been alerted by developments in a country nearby, the UK. The spread of the virus forced PM Johnson to impose tougher rules, starting next week. It hurt sterling as well. EUR/GBP almost jumped a big figure, from 0.85 to just shy of 0.86. UK money markets continue to price out a first (small) rate hike at next week’s BoE meeting. Asian-Pacific markets are less worried. The equity scoreboard is a bit more mixed this time around but with nice gains nevertheless for the likes of China (1-2%). Consumer inflation in the country rose to 2.3% in November, the highest since August 2020. PPI however eased from a 26-year high at 13.5% to 12.9%. For markets, this meant more scope for the PBOC to ease policy and support the economy. They saw their case also strengthened by a weaker-than-expected yuan-fixing today, signaling some unease with the current strong level of the Chinese currency. Most major currencies trade little changed. The Aussie en kiwi dollar outperform, the euro lags. Sentiment and technical considerations remain key for trading today. Equity buoyancy has eased but may stick to a gradual recovery if the good news around omicron keeps coming. The downside in core bond yields is probably limited, especially in Europe where there’s relative more room to recoup after the recent sharp risk-off repositioning. The German 10y yield capped -0.35% yesterday and has the eyes set on -“0.29/0.30% next. In the US, we’re looking at 1.57%. Day-to-day gyrations in EUR/USD are tricky recently but it seems that the bottoming out process is ongoing. We don’t expect sterling to stage a huge comeback in the run-up to an uncertain BoE meeting next week. That said, EUR/GBP’s upside potential within the downward sloping trend channel remains limited with 0.863/5 as resistance.
News headlines
The National Bank of Poland continued its monetary tightening cycle yesterday with a 50 bps rate hike from 1.25% to 1.75%, taking the policy rate above the pre-pandemic 1.5% mark. The MPC remains committed to take further action to help reducing inflation towards target. Economic conditions are expected to remains favourable in coming quarters though negative risks come from the uncertain impact of the pandemic as well as from supply-side constraints and high energy commodity prices. Polish inflation (7.7% Y/Y) is now at risk of running above the NBP’s inflation target (2.5% +-1%) over the policy horizon. Apart from the “transitory” items, the economic recovery added to price increases driven by a marked increase in average wages. NBP governor Glapinski will hold a press conference later today at 3 pm CET. The Polish zloty lost slightly ground after the (discounted) decision while some also expected a bigger rate hike. EUR/PLN rose from 4.59 to 4.62. The NBP continues referring to the potential use of FX interventions depending on market conditions.
The Brazilian central bank lifted its policy rate by 150 bps from 7.75% to 9.25% and anticipates a third straight 150 bps move in February. The BCB is on the most aggressive tightening path in the world, with the key Selic rate already 725 bps higher than in March (0.5%). It deems it appropriate to advance tightening significantly into restrictive territory. Inflation hit 10.67% Y/Y in October with tomorrow’s November data expected to show another acceleration. The BCB advances its inflation (expectations) crusade even if the economy went into recession in Q3. The Brazilian real enjoyed the backing of the BCB with USD/BRL diving from 5.63 to 5.53.
