Markets largely reflected strong macro news this week until the spook from a new COVID-19 variant/mutation (B1.1.529) observed in South Africa hit risk sentiment. The USD continued to strengthen amid strong US data and President Biden’s re-nomination of Jerome Powell as Fed chair. At the same time, COVID-related restrictions are weighing on the euro. Yields edged higher through the week on the back of reacceleration in economic activity and hawkish comments from ECB governing council members. On the B1.1.529 news, they dropped again and Bunds hit the lows of last week. It has been somewhat of a roller coaster week for equities with global indices down across the board on COVID-fears after a week with VIX volatility at its highest since early October. There is also a flip side to strong macro news for stock markets these days as it moves us closer to monetary tightening.
In the expectation of a coordinated release of strategic oil reserves from the US, China, Japan, India and South Korea, oil prices traded lower, but in the end the release was not enough to satisfy expectations and oil increased back to levels around USD82 per barrel before plunging to 78 levels amid B1.1.529 fears.
The European economy is faring better than expected with November euro area PMIs surprising on the upside. Particularly the service sector picked up pushing composite PMI higher for the first time since the reopening fumes dozed off in July. However, German Ifo figures indicate slowdown in the coming months particularly in the service sector as further restrictions are lurking ahead and consumer confidence are heading lower in Germany, and in the euro area, as high inflation erodes purchasing power. COVID-related restrictions are spreading all over Europe as the number of cases are surging many places. This is bound to weigh on the service economy.
We have seen strong macro data outside Europe as well with US initial jobless claims below 200.000 for the first time since the pandemic. October consumer spending and capex orders were strong too. The recent recovery in Japan is also solid with increases in both manufacturing and service PMIs indicating easing supply chain issues and a strong rebound from the reopening of the economy on 1 October.
Next week markets will start by tuning in on November inflation figures from Spain and Germany on Monday and then the euro area on Tuesday. We expect a small increase from 4.1% to 4.2% in euro area headline HICP inflation. We will also keep a close eye on potential new restrictions in Europe. The Netherlands and Austria are already in lockdown and further countries could follow.
In the US, we also have several key releases next week, in particular the jobs report, but also ISM manufacturing and ISM non-manufacturing. In China, we expect another weak PMI release. On the oil market, all eyes will be on OPEC, as the group has said earlier that they consider a release from strategic reserves unjustified by market conditions and could respond by reconsidering plans to add supply to the market.
