Welcome back, bargain hunters. They emerged from the sidelines today to prop up equity markets after two days of selling off. The EuroStoxx50 bounced off support at 4040 with gains of 1.5% as sentiment improved markedly. Capturing resistance around 4100 for now is a bridge too far though. US stock markets open almost 1% higher. Other risky assets including oil also perform better (Brent +0.75% to trade $74.5 a barrel). There’s no specific trigger for today’s turnaround in mood but soothing reports and comments from some high profile investors saying that the Evergrande crisis is manageable and/or not systemically important may have helped ease market fears. We’re anyway keen to see how Chinese markets are going to adjust to the recent turmoil when they reopen for the first time this week. In other news today, the OECD published new interim forecasts (see headline below). The headlines however just came and went without being actually noticed. It’s risk-on also on FX markets. This means smaller currencies are profiting with the NOK and CAD leading on the oil price rebound. The dollar suffers from ebbing safe haven flows and in the runup to the Fed policy meeting tomorrow. EUR/USD edged higher towards 1.173. Sterling’s performance is disappointing given the whammy it received yesterday. EUR/GPB still ekes out a small gain towards 0.859. Thanks to the weaker USD, cable advances marginally to 1.366. The Hungarian forint holds ups well even as the MNB hiked rates with less than expected (15 bps to 1.65% vs 1.75% consensus). The zloty is underperforming CE peers hugely with EUR/PLN jumping beyond 4.6(2) amid escalating fears for an inflation doom loop. Both the yen and especially the Swiss franc are surprisingly resilient though. USD/JPY eased from an intraday high around 109.7 to 109.26 (from 109.44 at the open). CHF rallies about 0.4% to the euro (EUR/CHF 1.08) and the USD (USD/CHF 0.92). This might be the result of activity on bond markets. Core bond yields forfeited on an early rise during the Asian session, conflicting with risk-on price action on other financial markets. The US yield curve flattens with the belly of the curve (5y ,7y both -1.4 bps) outperforming. German yields ease 1.4 bps (5y) over 1.8 bps (30y) to 2 bps (10y). It was already a close call yesterday, but the 10y variant (-0.34%) today tumbles out of the upward sloping trend channel.
The Swedish Riksbank kept its policy rate unchanged at 0% and it is expected to remain at that level for the entire forecast period (Q3 2024). The central bank will exhaust its QE envelope during Q4 before keeping the portfolio more or less unchanged during 2022. Swedish growth has been higher than expected, but it is primarily inflation that has been surprisingly high in relation to the forecasts in July. The Riksbank upgraded the 2021 inflation forecast from 1.8% to 2.3% for 2021 and from 1.7% to 2.1% in 2022. 2023 & 2024 prediction remain stable at 1.8% and 2.1%. The Riksbank thus sticks with the temporary higher inflation narrative even as the bump is significantly higher than expected back in July. GDP forecasts were broadly unchanged in 2022-2024 (3.6%-3%-1.8%), but upwardly revised for this year (4.7% from 4.2%). The Swedish krone didn’t respond to the central bank’s unchanged, dovish behavior with EUR/SEK stable near 10.17.
The OECD published its interim economic outlook. The global recovery remains strong, but uneven with countries emerging from the crisis facing different challenges. World GDP growth forecasts stand at 5.7% and 4.5% for this year and next. Inflation is rising, but is expected to moderate. Near-term risks are on the upside, particularly is pent-up demand by consumers is stronger than anticipated or if supply shortages take a long time to overcome. The impact of past increases in shipping costs and commodity prices is already sizeable and is likely to linger though much of 2022. An increasing share of items in price baskets already have prices rising 4%+ rates. A lasting upward move in inflation is likely to occur only if wage inflation intensifies substantially or if inflation expectations drift upwards. Global central banks need to set out clear strategies for coping with inflation risks, the OECD urged.