Hesitancy was the dominant mood on global markets on Friday. Ever more topics are coming to the forefront, potentially derailing the buy-on-dips momentum that dominated trading in risky assets/equities during most of the (post-) pandemic era. Markets feel the point is nearing where monetary stimulus will be scaled, with Fed (and later ECB) tapering looming. Still, the recovery faces multiply hurdles, ranging from uncertainty on the ST development of the pandemic, over to the potential growth impact from soaring commodity and energy prices, to several potential political headwinds (China regulation, US debt ceiling) or other event risks (Evergrande). Both US and European equities finished with losses of up to 1.0%. At the same time, safe haven core bonds failed to profit. German yields extended their protracted rebound, rising 0.8 bp (2-y) to 2.2 bp (10 & 30 y). Comments/headlines on several ECB (Lane, Kazaks …) members assessing whether inflation might turn out higher than the September ECB forecasts served as a ‘sign of the times’ for European bond investors even as the comments remained ‘two ways’. The German 10-y yield tested the -0.27% resistance, reaching the highest level in more than two months. US yields rose up 2.4 bp, with the belly of the curve (10-y & 5-y underperforming). Real yields were the driver. Early in the session, EUR/USD was supported by the rise in EMU yields, but safe haven buying finally caused the dollar to win the intraday battle. EUR/USD closed at 1.1725. Aside from the euro, the likes of the yen (close USD/JPY 109.93) and the Swiss franc (close EUR/CHF 1.093) weren’t able to compete with the USD’s safe haven bid, probably due to the rise in real yields. The damage for sterling could have been bigger considering the combination of risk-off and poor UK august retail sales. EUR/GBP closed at 0.8537).
Several main Asian markets (Japan, mainland China, Korea) are closed for a regional holiday. However, indices in Hong Kong (-3.4%) and Australia (-1.9%) show that the risk-off still dominates, with the fate of Chinese property developer Evergrande and a continuation of the sharp decline in iron ore serving as catalysts for investor uncertainty. In thin markets, the dollar remains in pole position (DXY 93.3; EUR/USD 1.1720).
Today’s eco calendar only contains second tier data, leaving markets counting down to the multiple central bank meetings scheduled later this week including Hungary and Norway (Tuesday), the Fed and the BOJ (Wednesday) and the BoE, the Norges bank and the Swiss national Bank (Thursday). We assume no profound change to the risk-off correction ahead of the Fed meeting. This favours the dollar, with EUR/USD 1.17/1.1664 serving as key support. On the interest rate markets, it probably won’t be that easy for the US 10-y yield to firmly clear the 1.37% resistance. The uptrend in German/EMU swap rates looks more solid, but it is unsure whether this will help the euro.
The ruling United Russia party, which backs President Putin, won a cracking victory in this weekend’s parliamentary election and prolongs its stay in power. The Central Election Commission put the party at nearly 48% of the vote with 64% of the ballots counted. The Communist party came in second at 21%. Despite the resounding victory, United Russia loses some ground compared with the 54% gathered back in 2016. The backlash might have even been bigger if it weren’t for the pre-ballot crackdown of opposition Kremlin critic Navalny. The Russian rouble doesn’t react to the news with EUR/RUB changing hands near 85.50.
UK Business Secretary Kwarteng warned that small energy providers are under pressure with large suppliers seeking a rescue plan to help them handle the cost of taking on the customers of smaller suppliers that may fail. Surging gas prices forced already seven unhedged energy suppliers into failure. Kwarteng will meet with industry heavyweights as well as regulator Ofgem in a third consecutive day of emergency talks. The UK government isn’t the only one to cushion the blow from surging gas prices. Italy will spend for example around €3.5bn to protect customers, France will hand out €0.58bn to poor households and Spain in planning an additional tax on power utilities while also capping consumers’ bills.