Thu, Oct 21, 2021 @ 17:52 GMT
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Weekly Focus – Risk Back On

Risk has been back on in markets this week with rising equities, VIX volatility back at normal levels after spikes last week and weaker safe haven currencies such as JPY. 10-year US treasury yields moved higher to the levels from two weeks ago and we see more upside ahead as we expect Fed will announce tapering at the September FOMC meeting, see Yield Outlook US – Tapering and market impact, 26 August. 10-year Bunds also closed on one month highs of -40 bps.

Industrial metals have been heading higher in a week where PMIs showed a European manufacturing sector continuing with full speed ahead and still in great need of supplies. Brent crude oil also bounced back above USD70 per barrel. We expect to see PMI levels head lower in the coming months and this is also the indication we got from the German business expectations, declining sharply for a second consecutive month following a 10-year high in June.

On the COVID front, we continue to see a particularly hard hit South East Asia. Another two interesting studies confirm that the delta variant leads to lower protection and vaccine efficiency wanes significantly after three months. The combination of waning immunity and weaker protection against delta means that we may see bigger outbreaks in Europe and in the US during the colder autumn and winter months.

ECB minutes from the July meeting were marginally on the hawkish side with mentioning of upside risks to inflation. The new 2 per cent inflation target with no downward bias received ‘broad consensus’ in the governing council.

In Japan, the leadership election in the ruling Liberal Democratic Party (LDP) will take place on 29 September ahead of the next general election by the end of November. The sitting president PM Suga is favourite to secure another term, however public support for his cabinet has plummeted to historic lows. No matter who will lead the LDP in the upcoming general election, they will risk losing their majority. Last time that happened, it lead to a chaotic political period with four different PMs in as many years.

In China, industrial profits growth declined for a fifth straight month in July as the economy is slowing. From the People’s Bank of China (PBoC) we got some quite dovish remarks with promises to boost credit support this week. We expect the PBoC will cut the reserve requirements ratio for all banks from the current 5% to stabilise credit growth.

Next week, China releases PMIs. It has declined more than expected in recent months and we look for a small further decline in August. It will keep focus on slowing growth and expected easing from PBoC and from fiscal policy. In the euro area, with the August print we get the last inflation release before the September ECB meeting. We expect a high print in the 2.6% area mainly due to base effects. In the US, we get the August jobs report where it will be interesting to see if we finally get more than a million new jobs or if the delta outbreak has hit the labour market recovery too hard. We expect a strong print but not necessarily above 1 million. We also get ISM indices, which will likely continue to reflect bottlenecks in the manufacturing sector.

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