Market movers today
Today’s highlight will be the flash PMIs for January in the euro area, UK and US. Services activity will likely continue to be adversely affected by renewed COVID-19 headwinds, but it will be interesting to see whether the manufacturing sector is also slowing and price pressures continue to ease up.
Italy’s presidential election kicks off today, but given the lack of clarity on candidates and broad public agreement among the parties, voting could well stretch over several days. There is a clear risk of political uncertainty returning over the longevity of Italy’s unity government, if current Prime Minister Mario Draghi is elected as President.
Markets will also keep a close eye on the Russia-Ukraine developments. Later this week the FOMC meeting will be in market focus.
The 60 second overview
Russia Ukraine tensions: The meeting between Russian and US foreign ministers kept hopes for a diplomatic solution alive. The US has promised it will send a written response to Russian demands later this week. Over the weekend, the US foreign minister Anthony Blinken rejected pressure to immediately escalate sanctions on Russia as it would limit western options in the future. The US letter and the Russian reactions to it will be key in determining the future path of the conflict.
Natural gas prices have continued to decrease in recent days, also amid reports that China has sold LNG cargoes back to the market after it had stocked up enough supply to see it through the winter. FT meanwhile reports that the US is holding talks with Qatar and other large gas exporters to plan contingency measures in case a Russian invasion of Ukraine disrupts supplies to Europe. However, European reluctance to commit to fixed, long-term contracts and limited LNG terminal capacity could still create hurdles.
COVID-19: New cases remain extremely high in Europe and the US and moving sharply higher in some emerging markets and Japan. However, new cases seem to have peaked in the UK and US. If other countries soon follow suit, it supports our view that we are indeed at “peak restrictions”. In mainland China, new cases remain record-high and although the government has eased its zero-covid policy slightly, the tolerance for local outbreaks is still very low, especially ahead of the Winter Olympics and Chinese New Year.
ECB: December minutes last week showed increasing divisions and uncertainty among the ECB Governing Council members about the inflation outlook. Over the weekend, Finland’s Olli Rehn said an increase in borrowing costs in 2023 is logical, in the absence of “any new economic disruptions”. Ireland’s Gabriel Makhlouf is a bit more cautious, saying he does not expect any rate hikes, but noted that risks of second-round effects of inflation, such as wages rising without productivity increases, could prompt action.
Equities: The growth sell off stalled on Friday. Investors did not buy the dip, but continued to sell cyclicals rather than outright growth. S&P 500 closed down -1.9%, Nasdaq -2.7%, Dow -1.3% and Russell 2000 -1.8%. This marked the third straight week of declines (S&P -8% and Nasdaq -15% YTD). In sectors, consumer staples, real estate and utilities were most resilient, while materials, energy and financials fared the worst on Friday. In fact, the winners over the past week has not been the outright value sectors, but defensives.
FI: Global bond yields ended lower last week, with 10Y US Treasuries moving below 1.8% and 10Y German government bond ended in negative territory, after having tested the 0%-level last week. The US Treasury curve continues to flatten, as the market is expecting the Federal Reserve to move rate hikes forward and begin already in March.
FX: Scandies in the hands of risk sentiment. The FOMC meeting is the key event this week.
Credit: Last week ended on a negative tone with relatively large widening in credit spreads on Friday. The sell-off was driven by geopolitical tensions on the Russian-Ukrainian border coupled with mixed Q4 corporate earnings (i.e. Netflix and Siemens Gamesa). Itraxx main widened 1.7bp to 55.3bp while Xover widened 7.8bp to 269.5bp.
