Thu, Jan 27, 2022 @ 14:36 GMT

Positive Risk Sentiment

Market movers today

  • The US JOLTS data will provide more info on job openings and the quit rate. Both are elevated right now reflecting high labour demand.
  • Bank of Canada (BoC) is set to leave monetary policy unchanged at today’s interim meeting. In October BoC ended QE and indicated the first rate hike in the “middle quarters” of 2022. Since then data has beat expectations consistently and while Omicron has created some uncertainty we can no longer rule out a rate hike as early as January 2022 even if our base case remains April 2022.
  • The Polish central bank is expected to deliver a 50bp hike.
  • In Sweden, Riksbank vice governor Per Jansson will speak.

The 60 second overview

There has been a positive opening on the Asian equity markets this morning combined with a modest decline in 10Y US Treasury yields on the back of the Chinese authorities’ support to markets in order to limit the potential negative impact from a fall-out in the property sector as well as some positive news on the Omicron variant.

The tensions between US and Russia over Ukraine continue despite the meeting between Biden and Putin yesterday, but so far the market impact has been modest as the markets are focused more on the potential negative impact from the new variant of coronavirus – Omicron.

We received some mixed news on Omicron yesterday, although data are still very premature. The bad news: New lab data shows that Omicron is indeed, as feared, better able to evade vaccine and infection-induced immunity. The evasion is “robust but not complete”,Protection from the Pfizer vaccine is likely reduced 20-40-fold but scientists still expect protection holds up against severe illness. Another thing we still do not know is whether protection is higher for people who have received a third vaccine shot. The good news: Based on preliminary data from South Africa, Omicron seems less severe from a micro perspective. The share of people in ICU or on ventilators are 2-3x lower than at the same stage of the delta wave and the time between admissions and discharges seem shorter, One word of caution is that although the micro/individual risk is lower, the macro/societal risk may not be. If more people get infected due to higher infectiousness/worse immunity, more people on an absolute level may still get admitted to hospital, so countries may hit hospital capacity. We will continue to monitor the development.

Reserve Bank of Australia (RBA) stuck to the dovish inflation narrative but remained optimistic that the Omicron variant should not derail the recovery in Australian economy. AUD gained support from the positive RBA outlook, but also from the Chinese trade data, which showed surprisingly high iron ore import volumes in November. However, this was most likely due to stockpiling given the clear fall in prices recently, and despite the signs of China strengthening its stimulus measures, the final demand outlook in the construction sector remains weak, pointing towards further weakness in Australian terms-of-trade.

Equities: Strong rebound in equities Tuesday as the narrative that Omicron may be very infectious but less deadly got more attention. Risk-on sentiment assisting most sectors with the cyclical and long-duration plays in strong outperformance. Vol dropped sharply and VIX fell below 22. In US Dow +1.4%, S&P 500 +2.1%, Nasdaq +3.0%, and Russell 2000 +2.3% The risk-on sentiment carrying over to Asia this morning with most indices being higher despite some less positive news around property developers in China. European futures are flat while US futures are slightly higher driven by growth-heavy indices.

FI: There has been modest movements in the global bond markets. US Treasury yields have stabilized around the 1.45% level this morning. We are awaiting the US CPI data on Friday as well as string of central bank meetings next week.

FX: Commodity currencies continued to rally yesterday with AUD, NOK and CAD leading the way. Notably, EUR/NOK dropped below 10.20 again. EUR/USD hovered below 1.13.

Credit: Credit markets tightened substantially yesterday, with iTraxx closing 17bp tighter (in 263bp) and Main 3.5bp (in 53.4bp). HY bonds finished 9bp tighter and IG 2bp.

Nordic macro

Riksbank Vice Governor Per Jansson speaks on the subject “Is it time to review the division of roles in macroeconomic policy?”. The speech will be published on the Riksbank website at 08:00 CET. The Minutes confirmed Jansson’s position as ultra-dove – he had doubts about raising the repo rate path but in the end he refrained from entering a formal reservation. While the speech will probably be soft, the title suggests it is more about the framework, possibly how monetary and fiscal policies can be better synchronized.


Danske Bank
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