Market movers today
- We expect the US Congress to pass a short-term funding bill before the deadline at midnight US time today, which would avert a government shutdown on Friday.
- On economic data, we will get both the German inflation and unemployment figures for September. The weekly jobless claims are released for the US and the KOF leading indicator is up from Switzerland.
- From central banks, we will get the minutes of the last week’s Riksbank meeting. We also have a range of Fed speakers coming up today, including Williams, Bostic, Evans and Bullard.
The 60 second overview
Looming government shutdown: Last night the House passed a bill to suspend the debt limit through December 2022. However, the bill is widely expected not to pass the Senate given the republican opposition as 60 votes out of 100 are needed to pass most legislation. Hence, the deadlock is still unresolved and the clock is ticking and a government shut-down is getting closer (US midnight today). See also Research US: Government shutdowns are usually short-lived and no is interested in a default by the end of the day that we published yesterday. In that report we also discuss what happens if the so-called X-day is passed when the US treasury would need to prioritize, delay and ultimately default on payments. US Treasury has said that X-day is October 18 – others have argued that it could be early November.
Evergrande crisis: While markets have quickly moved to other issues, we would warn against too much complacency on China’s property crisis. In a new paper we describe the perfect storm facing Chinese developers and what is needed from the government to contain the crisis, see Research China – ‘No ‘Lehman moment’ but financial stress is not over.
Central banks: In a virtual panel debate with Powell from the Fed, Lagarde from ECB, Kuroda from BoJ and Bailey form BoE all basically repeated that the current supply disruptions and high inflation will be temporary. But still it cannot conceal that global central banks have started the – though very cautious – process towards a post-corona normalisation of monetary policy with BoE and Fed taking the lead. Recent market moves show that market believe that eventually the ECB will also follow suit.
Gas, electricity and oil prices: European spot natural gas prices rose to a new record high yesterday with the 1M TFF forward in the Netherlands rising EUR 9 to EUR 86.5 EUR/Mwh. In the UK, three smaller energy companies targeting the retail market collapsed yesterday due to the recent spike in natural gas prices. 10 power suppliers have so far collapsed in the UK. Oil prices edged lower yesterday as the market is awaiting the OPEC+ meeting next week.
Equities: It felt like equities made a comeback yesterday. In Europe equities were higher, but globally equites were flat, measured by the MSCI world indices. Interesting to see defensive/value/large cap continuing to outperform and tech sector continuing to underperform despite risk appetite improving and yields being flat. In US, Dow +0.3%, S&P 500 +0.2%, Nasdaq -0.2% and Russell 2000 -0.2%. This morning Asian markets are spilt with Hong Kong underperforming and most other markets in green. European and US futures are higher.
FI: For the first time since the FOMC meeting last week, yields ended lower on the day. Periphery led the risk on mood, with BTPs-bund spreads tightening 2.3bp, just shy of the 100bp mark. Bund yields declined 1bp. A similar performance was observed in the US. European inflation continues to rally with 5y5y touching 1.82% yesterday amid market speculation of central bank behavior in response to higher inflation. We expect notably ECB to take a patient approach before acting.
FX: Yesterday’s session in FX markets was all about the USD appreciating and EUR/USD moving close to a full figure lower. On the other end of the spectrum, NZD, MXN and NOK all posted losses in excess of 1% vs the greenback while JPY and CAD proved more resilient.
Credit: On the back of better overall risk sentiment, credit also improved yesterday. Both Xover and Main tightened c.0.5bp. HY bonds tightened 4bp while IG just tightened marginally.
Nordic macro
The Swedish National Institute of Economic Research’s (NIER) released new forecasts yesterday. The NIER foresees a further relatively sharp rise in CPIF-inflation in coming months – to a peak at 3.5% in November – to a large extent driven by energy prices. However, energy prices (electricity) is expected to fall in 2022 as a result of two factors. First, according to the Swedish energy agency, production by wind-mills will rise by 30% in 2022, secondly a Finnish nuclear power plant is expected to be started in 2022 with production amounting to 14% of electricity usage. Since the Nordic electricity markets are integrated this will put pressure on prices in Sweden too.
The Riksbank minutes from the September policy meeting are released today. After the policy announcement there has been some discussion if there has been a change of mind regarding the size of the balance sheet or more specifically if the Riksbank after all might not re-invest all maturing securities in 2022, in effect a QT (quantitative tightening). We doubt it.
