Market movers today
- Today’s main event will be the FOMC meeting, where we expect the Fed to announce a tapering of their QE asset purchases. We expect tapering to start immediately in November with a pace of USD 15bn per month, and with risks tilted towards a faster pace. Note that due to European markets switching to wintertime, we get the Fed announcement at 19:00 CET and the press conference at 19:30 CET. See more in our Fed Research Preview: Tapering yes, but how fast?
- National Bank of Poland will also announce their monetary policy decision today. We expect a 50bp in line with consensus but risks are tilted towards a larger hike.
- We also get the US ISM non-manufacturing index this afternoon following the ISM manufacturing release on Monday, which was weaker than expected.
The 60 second overview
FOMC: The key event this week kicks off tonight with the FOMC meeting. Markets generally enter the meeting from the point of view of being ‘upbeat’. At least, US and European equities are close to or above all-time highs and equity volatility (VIX) is quite low. In FX, there seem to have been a small tilt towards dollar strength recently, though. The event itself appear to have been well communicated and it is a consensus event that tapering will be announced. Focus, thus, will turn to how fast Fed expect to hit zero purchases and any potential guidance on rates.
RBA meeting causes repricing of global rates: Rates markets recorded a strong relief rally yesterday led by the short end and the belly of the curve. The RBA’s meeting overnight led to a strong repricing from the morning in what can best be characterised as a reversal of the previous days strong market reaction leading up to and after the ECB meeting. 1y1y €STR dropped 11bp on the day while 5y Germany was 7bp lower on the day. After a couple of sessions with severe pressure on the Italian bonds, the performance from Monday afternoon extended into yesterday with 10y BTPs-Bund spread tightening 8bp to around 123bp level. However, today’s FOMC meeting, tomorrow’s BoE and Friday’s US labour market report will be very important for the lasting effect of this move. We expect the volatile market conditions are going to stay with us for a while.
Equities: Equities were moderately higher on Tuesday, which was enough to tick in on new all-time highs. The inflation trade reversed somewhat with growth and quality among the outperformers, such as tech and health care. Dow and S&P 500 closed up 0.4%, Nasdaq 0.3% and Russell 2000 0.2% after the small cap rally on Monday. US futures point lower though, in line with Asian markets down -0.5%-1% this morning.
FI: Rates markets recorded a strong relief rally yesterday led by the short end and the belly of the curve.
FX: The reaction in EUR/USD to tonight’s FOMC meeting may be volatile but spot is likely headed lower. A dovish BoE may send EUR/GBP higher. EUR/NOK back in the mid 9.80s.
Credit: Though CDS indices performed well yesterday the story was quite different for cash bonds. iTraxx Xover and Main both tightened 2.4bp and 0.4bp, respectively. IG bonds widened 1bp while HY widened 4bp.
