Market movers today
The highlight today will be the ECB meeting, where we look for a 75bp hike in all three policy rates (see also ECB Research: We expect 75bp at the meeting next week, 29 August). Hawkish comments from ECB members have recently highlighted that persistently high inflation takes precedence over the deteriorating growth outlook and upward revisions in the inflation projections should also support a larger rate move. Markets price in a 65% probability of a 75bp move, while analysts remain split 50-50, setting the stage for an interesting meeting.
We expect Danmarks Nationalbank to follow the rate hike from ECB 1:1 and in our base case to raise its key policy rate to 0.65% thereby marking the end to negative policy rates in Denmark. An announcement would come at 17:00 CET.
In Norway, GDP figures for July are on the agenda and we expect the mainland economy to expand by 0.2% m/m, confirming that growth is very much on the wane.
Markets will continue to follow EU signals ahead of the EU energy minister meeting tomorrow on emergency tools to handle to the energy crisis. Price caps, windfall profit taxes and emergency credit lines for energy participants look set to be discussed as possible tools.
The 60 second overview
Markets. Yesterday’s session was characterised by a drop in oil and natural gas prices, a move lower in yields, a weaker USD and a general relief rally in duration sensitive equity sectors. The drop in both global yields and oil prices eased some of the upward pressure on USD/JPY after the cross earlier this week hit the highest level since 1998. Overnight the moves have extended into Asian markets with most of the big Asian equity indices trading in green. Western equity futures are flat.
Oil prices. This week’s drop in oil prices has sent Brent crude back below USD 90/bbl for the first time since February. Interestingly, the recent drop follows Monday’s announcement that OPEC+ intends to cut output by 100K bbls highlighting the growing demand concern from OPEC+ amid new COVID lockdowns in China and rising recession fears in Western economies. Our baseline case is for Brent crude to trade close to USD 100/bbl for the rest of the year but front-loaded monetary tightening and new lockdowns in China pose a clear downside risk to that call.
Fed speakers. Several Fed board members have been on the wire reiterating their determination to bringing inflation under control. As we approach the silent period ahead of the 21 September Fed meeting both rates pricing and analyst expectations seem to shift towards a 75bp hike. Our call remains for a 75bp hike. We expect the Fed to keep tightening policy until there is a clear picture the economy is weakening and the labour market softening in order to conclude that underlying inflation pressures are coming down towards their 2% target.
Bank of Canada (BoC) hiked policy rates in yesterday’s session for the fifth time in this hiking cycle. While BoC surprised markets in July with a 100bp hike yesterday’s hike was of an expected 75bp which brings the target for the overnight rate to 3.25%. As has been the case for many other central banks recently, BoC has also deemed it necessary to frontload monetary tightening. BoC stated that the longer inflation expectations are elevated the greater the risk that elevated inflation becomes entrenched. BoC stated its expectations that policy rates will have to rise further and the extent will depend on incoming data. Short-end rates rose upon announcement while the move in CAD FX was very modest.
Reserve Bank of Australia (RBA). Overnight a speech from Governor Lowe moved markets as Lowe alluded to the case for slower rate hikes moving forward. Tuesday morning RBA hiked its cash rate target by 50bp to 2.35% with rates markets pricing in slightly less than 3 additional hikes of the same size. Following the speech 2Y AUD swap rates dropped more than 10bp while AUD/USD fell roughly 20 pips.
Equities: Equities finally stopped the bleeding yesterday. Lift-off driven by US, Nasdaq, cyclical growth stocks with VIX declining. Broadly speaking, all the stuff that has suffered for almost a month got some relief yesterday as long bond yields dropped significantly and the oil price dropped to a level suggesting US headline inflation may plunge when the October reading is due in a couple of months. No surprise to see energy stocks as a major loser yesterday and tech, consumer cyclical and utilities outperforming. US indices all closing higher with Dow +1.4%, S&P 500 +1.8%, Nasdaq +2.1% and Russell 2000 +2.2%. Positive sentiment carrying over to Asia this morning with broad based gains led by Japanese stocks rising 2%.
FI: European curves bull flattened yesterday, with most of the move happening early in the day. Bunds ended 5bp lower amid BTPs-Bund spread tightening 5bp. The front-end was repriced slightly lower, in particular in the 2023 segment, likely on spill-overs from dovish comments from the BoE, but for today’s ECB meeting markets now price in 66bp. Bund ASW spread has tightened significantly since Tuesday, where Bund ASW is now 10bp tighter at 90bp and Schatz-ASW have tightened 20bp.
FX: Yesterday’s session was generally characterised by a relief rally in the European natural gas sensitive currencies like HUF, PLN and EUR. The USD traded on the back foot while the upward pressure on USD/JPY eased amid lower yields and energy prices. EUR/USD is back trading close to parity.
Credit: Credit markets saw a second day in a row with strong issuance in Europe’s primary market before ECB’s next meeting and rate decision Wednesday. In Scandi space SKF issued a EUR400m 6-year green bond at MS+95bp after initial price talks of MS+135bp and initial size talk of EUR300m – a clear testament to strong demand for high quality issuers in Scandi space. The deal order book was above EUR2.5bn – again a clear sign of strong interest. Overall on market level iTraxx Main was 3bp tighter at 114bp while Xover was 15bp tighter at 558bp.
