Asian/Chinese markets started the week in risk-off modus this morning as Chinese authorities took additional regulatory steps to prohibit ‘unwarranted’ (often monopolistic) practices from local tech giants. However, in a session devoid of any important data, European equities quite easily decoupled from these Asian trends. Even some ‘reflationary tendencies’ could be noticed, as oil, natural gas and (some) industrial commodities (aluminum, copper) maintained a good bid. Major European indices rose up 1%+ though are currently off the intra-day highs. Whether these price rises are supportive for overall growth is another story. At least today, equities don’t bother too much. The impact of this constructive sentiment on bonds/interest rate markets or FX was less straightforward. Core European and US yields even decline, albeit marginally. The EMU 10-y inflation swap (1.86%) touched the highest levels since end 2013, but this was still counterbalanced by a persistent decline in real yields. German yields currently are changing less than 0.5 bp across the curve. ECB’s Schnabel in an address in her home country repeated the ECB’s assessment that the prospect of persistently excessive inflation remains highly unlikely. However, should inflation sustainably reach the 2.0% target unexpectedly soon, she committed the ECB will ‘act equally quickly and resolutely’. The US yield curve flattens slightly with the 2-y yield little changed but longer maturities easing up to 2 bp (30-y) even as US equities also opened with decent gains. Tomorrow’s US inflation data remains the next milestone as global markets are counting down to next week’s Fed policy meeting, which is expected to clarify the Fed’s intentions for tapering.
Underlying reflationary tendencies, contrary to what is often the case, initially didn’t hamper a further USD rebound, even as the momentum slows during as US traders joined the fray. DXY is testing intermediate resistance in the 92.80/85 area. USD/JPY tries holding north of 110. EUR/USD (1.1790) declined further below the 1.18 handle as USD resilience was reinforced by persistent post-ECB euro softness. EUR/USD 1.1758 marks the 62% retracement of the late August/early September rebound. Euro softness also pushed EUR/GBP (0.8525) further south in the 0.8450/0.8615 consolidation range. Cable is trading little changed at 1.3835. Later this week, markets will receive an in extenso update on the UK economy with labour market data (tomorrow), price data (Wednesday) and retail sales (Friday). The data might fuel the debate within the MPC as to whether conditions are falling in place for the UK economy to eliminate spare capacity in such a way that would enable inflation to hold around the 2.0% target in a sustainable way. If in case of positive data, the Bank of England probably will continue to take a guarded approach on hiking policy rates which we don’t expect to occur before the middle of next year.
The Organization of the Petroleum Exporting Countries (OPEC) in its monthly report said that oil demand in Q3 2021 has proved to be resilient, supported by rising mobility and travelling activities. OPEC downwardly revised Q4 2021 world oil demand estimates though as the increased risk of COVID-19 cases primarily fueled by the Delta variant is clouding prospects. As a result, oil demand recovery is partially delayed into H1 2022 with an upward revision to total 2022 forecasts by 0.9 mb/d to 100.8 mb/d, exceeding pre-pandemic levels. Brent crude rises north of $73.5/b in a general constructive market sentiment.
Shanghai International Port Group said in a statement that it has suspended some container-related operation in the world’s biggest container port as the city braces for Typhoon Chantu to make landfall. Most flights in and out are also cancelled today and tomorrow. In the US, the National Hurricane Center warned that tropical storm Nicolas is forecast to strengthen to a hurricane by the time it reaches the northwest Gulf coast.