Market movers today
Ahead of the G20 leaders’ summit tomorrow, President Xi and Biden are set to meet for their first face-to face meeting today. Securing ‘guardrails’ on the Taiwan issue could be the most important topic, while we also look out for comments from Xi about his opposition to using nuclear weapons.
Fed’s Brainard and Williams will have opportunity to give markets their perspectives on last week’s US inflation downside surprise. We argue that a Fed ‘pivot’ is premature amid lingering inflation risks from various fronts.
Later this week, the UK updates markets on its fiscal plans and US retail sales for October will reveal more about the state of the US consumer.
The 60 second overview
China. Friday’s risk appetite was supported by the repercussions of the US CPI as well as easing of quarantine restrictions in China for travellers entering the country. a) the quarantine for incoming travellers were changed to 5+3 (5 days in quarantine hotel or government facility followed by 3 days at home) from 7+3, b) the same shorter quarantine applies to close contacts and c) close contacts of close contacts will no longer be identified, d) a system that penalizes airlines for bringing in virus cases will be scrapped. However, there are no signs of any material change to the policy apart from tweaks to try to ease the pain of the policy. China also changed rules to support the failing property market.
US: Over the weekend, the Democratic party’s Catherine Cortez Masto was projected to win the Nevada senate election, which means that Democrats will maintain at least the 50-50 majority in the Senate irrespective of the result of the Georgia runoff election. While the result is a positive surprise for the Democrats, it should not have a strong impact on the markets as Republicans are still the favorites to win control of the House, which would end up with a divided Congress. This week markets will continue to digest last week’s CPI print with special focus on the October Retail sales on Wednesday, which will provide some light on whether the easing price pressures truly reflected lower demand as Fed would hope. We continue to see risks of inflation turning out more persistent than expected, read our take from: Research US – Inflation risks are not over yet, 11 November.
Fed: Overnight Fed’s Waller downplayed the significance of a single US CPI figure, while acknowledging the development is good news. He continued his hawkish views saying there are ‘Ways to Go’ before being done on rate hikes.
EC forecast: The new EU Commission autumn economic projections foresee a short euro area recession during Q4 22 and Q1 23 as their baseline, with 2023 GDP growth revised down to 0.3%. Germany and Sweden will be hardest hit by the recession. Euro area inflation is projected to average 8.5% this year and 6.1% in 2023, before declining to 2.6% in 2024. This also ups the pressures on ECB to have a recession in their baseline scenario for the December forecasting round and we have already heard a number of GC members this week hinting that the recession view is gaining ground (although in contrast to the Fed, with no slackening of the hiking pace yet in sight).
Equities: What a week for equities. What started as mild optimism turned into an outright rally. Tech – our preferred cyclical sector – rebounded by 10% in the US. Our growth and quality preference was even more absurd in the Nordics where real estate returned a massive 20%. Interesting to see this rally resulting in only a small move lover in VIX and gold having a very strong performance alongside the equity rally. This underscores how sensitive equity investors have been to inflation, central banks and yields. This will probably continue for some time. However, the bad news being good news cannot take equities much higher from here on. In US, equities ending just off best levels on Friday with Dow +0.1%, S&P 500 +0.9%, Nasdaq +1.9% and Russell 2000 +0.8%. Asian markets are mixed this morning with Chinese stocks higher on renewed hope for the property sector while most other markets are lower. US futures in red this morning while European futures are higher.
FI: Friday’s price actions were mostly a reversal of the bond market rally after the US CPI on Thursday. The 12bp sell-off in the 10y German Bund leaves the Bund 1bp lower than the pre-US CPI level at 2.16%. Unsurprisingly, the belly of the curve underperformed the most. Bund ASW tightened 5bp to stand at 79bp, which is the tightest since July.
FX: Thursday’s US CPI report had a major impact in FX markets, triggering a sharp sell-off in the USD which has pushed EUR/USD above 1.03 for the first time since August. Scandies were among the winners within G10, where notably the SEK might have found extra support in SEK positive M&A flows, which could continue into the start of this week. Note that we will publish our latest FX Forecast Update later today.
Credit: Credit markets saw further tightening on Friday as iTraxx Main was tighter by 1.7bp and Crossover by 4.8bp, with the indices ending the week tighter by 11.8bp and 52.2bp, respectively (at 97.6bp and 481.9bp).
