Markets
It’s crunch time on stock markets. Risk aversion on Asian markets (Evergrande-related) spilled into Europe. Main indices lose over 2.5%. The EuroStoxx 50 fell below 4082 support, painting a double top on the charts. The final target stands around 3900 which matches the July low. The total correction from the September top now amounts 5.64%. Ever since the start of the vaccination rally early November last year, investors stepped up to buy the dip (5-6% corrections lower) on every single occasion (4 times). We suspect it likely that eagerness to do so is more limited this time around. First and foremost, inflation (expectations) continue rising. Second, central bankers are about to signal the start to policy normalization. If not, they risk inflation (expectations) running out of control. Both scenarios suggests cautiousness going forward on both equities and bonds. The latter was visible last Friday on ECB gossip, but less so today. We see some reasons. First, ECB rumours were rapidly denied from inside Frankfurt and betting against the central bank over the past years hasn’t been the best investment plan. Second, the reaction function of core bonds hasn’t been clear-cut over the past weeks. It’s a give and take between the classic risk function and a scare of the inflation bogeyman. Finally, the US 10-yr yield again bumped into 1.37% key resistance without a break higher. We suggest this will be difficult ahead of Wednesday’s FOMC meeting where the Fed faces the tough call between a (hard) reality check and a (soft) ostrich attitude. Choosing the second only delays and likely worsens the future hit. The US Treasury yield curve bull flattens with yields sliding 0.5 bps (2-yr) to 3.7 bps (30-yr). Changes on the German curve are more or less similar, ranging between -1.6 bps (2-yr) and 3.8 bps (30-yr). 10-yr yield spreads vs Germany widen by up to 2 bps.
FX markets deserve some special attention today because of relatively big moves. The Japanese yen and Swiss France are the ones to beat the dollar. EUR/USD tested the 1.17 big figure. USD/JPY drifts towards 109.50; but remains within its narrow sideways range of late. The EUR/CHF rebound higher since August strands at 1.0940 with return action today sub 1.09. Amongst the biggest victims of the risk-off climate are the Hungarian forint (EUR/HUF 353) and the Polish zloty (EUR/PLN important resistance at 4.60). A weaker currency might translate in another 30 bps rather than 15 bps MNB rate hike tomorrow while throwing a spanner in the works of the NBP who vows to keep policy rates unchanged this year amid inflation at a 20y-high. The Swedish krone and Aussie dollar are in similar dire straits. We must add though that the start of the US session is causing some reversal on intraday price trends.
News Headlines
The BIS warned for a growing “green bubble” risk. It is seeing signs that valuations of ESG assets “may be stretched”. Some estimates put a total value of $35tn in 2020 on ESG-focused assets. Borio, head of the monetary and economic department, compared the surge in ESG ETFs and mutual funds to parts of the MBS market in the runup to the financial crisis or the internet stock boom in the early 2000s. Authorities should be aware of the risks that these shifts of investor demand can have.
Polish factory inflation accelerated from 8.4% y/y in July to 9.5% in August, slightly higher than the 9.3% consensus and matching levels seen in 2011. The m/m figure eased from 1.5% to 0.6% but is still significantly higher compared to previous years. All sectors but mining & quarrying added to the monthly increase with price pressures in electricity & gas and construction building the fastest. In other producer-side news, industrial output fell in August with 2.5% m/m (from -3.9% in July) to bring the yearly figure to 13.2% (vs. 9.8% in July). All categories retreated, with electricity and gas underperforming from a relative point of view (from strong increase in July to -1.7% m/m in August).
