Market movers today
- Today’s focus is on preliminary PMIs for the euro area (including Germany and France), the UK and the US. Most PMIs are likely to show that we are still in the middle of a manufacturing boom, while the service sector is struggling due to restrictions. This is well known and should not have a large impact on markets.
- We also get UK retail sales for December, which are expected to show an increase, as the UK had left the second national lockdown and the third one was not imposed until early January.
The 60 second overview
COVID-19 vaccines and tail risks. As everyone (including ourselves) now seems to believe that the macro outlook is much better, especially for the second half of the year (after a long and difficult winter with a high number of coronavirus cases and lockdowns), we think it is worth highlighting a major tail risk to this consensus story. Currently scientists are analysing how effective the vaccines are against new mutations, especially the South African one. There is a risk that the vaccines are ineffective and that vaccinating against the old variants will not be enough to end the pandemic this year. This would mean another ‘lost’ year, as the strong economic comeback would be postponed into 2022 and may imply a significant setback in risk sentiment with investors pricing in a very positive outlook at the moment. We dig further into the topic including references to some relevant scientific papers released this week in our COVID-19 update: Tail risk that vaccines are ineffective against new mutations, 21 January.
Small hawkish twist at ECB meeting. The ECB meeting concluded yesterday was fairly uneventful, with no new signals. The market interpreted the inclusion of the explicit reference to financing conditions in the 13:45 CET decision as a small hawkish twist, sending rates higher and the EUR/USD stronger. Both metrics fell back during the press conference. However, the reference was also in the introductory statement in December and refers to general financing conditions, i.e. multiple rates, and not a specific curve or point on the curve. See below for market reaction.
Equities markets lost some steam on Thursday, with US equities closing narrowly mixed. Nasdaq finished at fresh records though, after another session of notable growth strength versus value. Meanwhile, small caps traded lower, extending this week’s underperformance (Nasdaq up 0.6%, S&P and Dow unchanged and Russell 2000 -0.9%). On sectors, Tech, Consumer Discretionary and Communication services were again the winning names amid another good day for the FAANGs (Facebook, Amazon, Apple, Netflix and Alphabet and Google). Energy was the big decliner, followed by Industrials, Financials and Materials lagging. Asian markets are taking a breather this morning, with most markets slightly lower and Hang Seng -1.4%. US futures indicated a similar opening, with markets lower or little changed at best.
FI. The fact that ECB and Lagarde yesterday made clear that the PEPP envelope may not be used fully put pressure on notably BTPs. We are somewhat surprised about the market reaction given that this is not a new signal, but some FOMC members mentioning the taper discussion in the US may have led to some uncertainty about the EGB space. The BTPs-Bund spread widened 4bp. The 10Y German bund rose 3.5bp on the day as a whole. Curves steepened from the long end.
FX. Renewed reflation-sparks weakened USD across the board yesterday (except for RUB). The ECB meeting was, as expected, a non-event, but EUR/USD moved closer to 1.22 supported by the reflation theme. The reflation theme also benefitted NOK and SEK, which both strengthened against EUR. EUR/GBP was unchanged around 0.885.
Credit. Despite a slight sell-off in CDS indices with Xover widening to 250bp (+3bp) and Main to 49bp (+½bp), cash bonds overall did well and HY tightened 4bp, while IG was unchanged.
Nordic macro and markets
Expected signals from Norges Bank. In sum, the Norges Bank meeting turned out to be the non-event for markets we had expected. The NB left rates unchanged and maintained its verbal guidance on rates and concluded that economic developments since December had been ‘broadly in line with projections’. Most notably there were no signs of worry in terms of elevated Nibor fixings, recent NOK FX strength, low inflation and COVID-19 induced restrictions. We still pencil in the first 25bp rate hike in September this year which is earlier than consensus and market pricing.
