It’s risk on again today, bells and whistles included. The reason is the same as yesterday’s: relief that the omicron virus strain according to preliminary data is not as sick-making as initially feared. When the Covid variant was first detected, it sparked a strong selling wave across risky assets that still has some room to recover. Bargain hunters gladly fill the remaining gap. The EuroStoxx50 jumps 2.5% higher, testing resistance around 4240. Wall Street opens with gains ranging from 1-2%. Commodities are having a good run as well. Natural gas (in Europe) spearheads the move with talk of sanctions on Russia should it invade Ukraine adding a geopolitical flavour to today’s price rise. It’s easy for Russia to respond by turning the gas taps amidst high demand and low European reserves. Dutch future prices for January are up almost 7%. Brent oil inches 2.4% higher. At $74.8/barrel it’s still some way from the $80+ levels in October and most of November though. The risk-on is also accompanied by higher core bond yields. The US curve bear flattens with changes going from +4.4 bps (2y) over 2.7 bps (10y) to 0.8 bps (30y). The short to middle end thus continues to underperform after Powell’s big turn on inflation. Since he went off-script before Congress on November 30th, the 2y yield moved up 18 bps, followed by half that amount in the 5y and compared to 3-7bps declines in the 10y and 30y. Gains for German yields amount to 2-4 bps in the 2y-10y spectrum. The damage for the German Bund from yesterday’s after-European-close drop in UST’s and Holzmann’s interview thus remains limited. We do notice some fallout of the latter perhaps on European peripheral spreads. Italy (+1 bp) is the notable exception in an otherwise spread narrowing move where Greece (-4 bps) is outperforming.
It’s not unusual these days to see the euro disappoint in a risk-on context but that doesn’t make it less painful to watch. US/EMU yield differentials, even being as marginal as today’s, favour the dollar over the euro. EUR/USD fell below 1.129 support again with technical considerations possibly exacerbating the downward move. At 1.124 the pair is looking for a return to the 2021 lows at 1.12. Even the Japanese yen and Swiss franc are taking the upper hand with EUR/JPY below 128 and EUR/CHF (1.04) erasing more than half of yesterday’s bounce. Commodity-driven currencies including the Canadian and Aussie dollar are ecstatic. EUR/GBP briefly dipped sub 0.85 but the British currency somewhat surprisingly lacks strong enough legs. Maybe next week’s BoE meeting is already nesting in investor’s minds.
Economic activity in South Africa Q3 contracted by a bigger than expected -1.5% Q/Q. Activity was 2.9% higher compared to the same period last year. Agriculture (-13.6%), trade and accommodation (-5.5%), manufacturing (-4.2%) showed the biggest declines. Aside from persistent factors related to the pandemic, riots and political unrest are seen as an important factors behind the Q3 contraction. The economy grew 5.8% YTD but is still 3.0% below the pre-corona level. The rand recently declined to USD/ZAR 16.36 on headlines of the potential negative economic impact of the omicron variant, but entered calmer waters as sentiment improved. The rand today is losing modest ground after the publication, trading near USD/ZAR 16.00.
The government in Poland has clearly changed its assessment on the merits of the ultra-loose monetary as conducted for so long by the National Bank of Poland. Cabinet spokesman Piotr Muller today in an interview said that a further rate hike by the National Bank of Poland at its policy meeting tomorrow won’t be seen as negative. Accelerating price increases are also becoming a political issue in Poland. The NBP is expected raise its policy rate by another 50 bps to 1.75% tomorrow. The NBP’s U-turn on inflation while no longer aiming for a weak, growth-supporting currency either, helped the zloty to rebound from EUR/PLN 4.70+ levels to currently near EUR/PLN 4.60.