Markets this week enjoyed quite an impressive post-omicron risk-on repricing. Investors are growing ever more confident that the variant won’t affect the recovery in a profound way. The S&P 500 again trades only about 1.0% from the all time top. Other indices, especially in Europe, still have a longer journey to go. Even so, last week’s technical alert is called off. Maybe there is good reason to reverse part of last week’s panicky sell-off. Question now is: what’s next? With few eco data on the agenda, European equities initially showed some fatigue, gradually drifting south. Further losses/profit taking halted on headlines from Pfizer/BioNTech that a third dose of their vaccine raised antibodies in a way that materially reduces the impact of the omicron variant. Still European indices are trading with losses of about 0.5%. US indices again slightly outperform, opening little changed. The mild risk-off and some ‘soft’ comments from ECB members Villeroy (French inflation back below 2.0% end 2022) and Rehn (suggesting to wait for more clarity before considering policy normalization) even pushed EMU/German LT yields temporarily below recent lows. However, bond sentiment also made a sharp U-turn after the Pfizer headlines. German yields currently are gaining between 2.5 bps and 4.5/5 bps (5-10-y). German 10-y yield tries to regain the -0.35% resistance after testing -0.40% earlier today. A tentative break of the 0.10% area in the 10-y European swap was also rejected. Still the picture on European yield graphs looks much more fragile compared to the US. US yields today are rising 1-2.5 bps across the curve in a tentative steepening move. The intra-day reversal in EMU core markets clearly also wrongfooted investors in EMU peripheral bonds which performed rather well this week. 10-y spreads of Greece and Italy widen 7 bps and 6.bps respectively.
The intra-day swings on interest markets to some extent filtered through in FX, but as was often the case, price moves remained much more muted. EUR/USD rebounded from the 1.1270 area to currently trade in the 1.1310 area. Still, the technical picture remains fragile, with first resistance at 1.1383 still some distance away. The yen also pays the price of losing interest rate support against the euro and the dollar. EUR/JPY is testing minor resistance at 129. 79. USD/JPY develops a similar pattern nearing the 113.90 area. The Swiss franc again shows resilient among the safe havens (EUR/CHF 1.0435). Sterling also wasn’t in good shape today. The UK currency suffered from press reports (FT) that the UK government is preparing new restrictions affecting travel and including an order to work from home. This isn’t a comfortable context for the BoE to start a ‘hiking cycle’. Cable touched a new YTD low below well 1.32. EUR/GBP trades near 0.8560.
Hungarian inflation accelerated by 0.7% M/M to 7.4% Y/Y in November, slightly beating consensus (7.3% Y/Y). The contribution of demand-sensitive products and food increased. Core inflation and core inflation excluding indirect tax effects stood at 5.3% Y/Y. Industrial goods prices rose by 0.6% M/M to above 5% Y/Y. Higher commodity prices translate into consumer prices with the global semiconductor shortage also playing a role. Services prices rose by 0.6% M/M to 5% Y/Y. The new inflation acceleration adds pressure on the MNB which can not but accelerate its tightening cycle aiming for less negative real yields. The forint remains vulnerable near levels around EUR/HUF 368.
The Bank of Canada kept its policy rate as expected unchanged at 0.25%. In its policy statement, the BoC no longer refers to “temporary” forces pushing up prices. It is closely watching inflation expectations and labour costs to ensure that the forces pushing up prices do not become embedded in ongoing inflation. CPI is expected to remain elevated in H1 2022 before easing towards 2% in H2 2022. The BoC still expects economic slack being absorbed in the middle quarters of next year as projected in October. Floods and the omicron variant pose risks to growth. The loonie is a tad softer after the decision, trading at USD/CAD 1.2650.