Mon, May 16, 2022 @ 18:21 GMT
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Dollar Largely Flat amid Macroeconomic Stalemate

Market movers today

Happy New Year! On this year’s first trading day we have a limited agenda ahead of us. Today, we get country-specific PMI manufacturing, including from Sweden and Norway. Overnight, Chinese Caixin PMI manufacturing is due.

This week’s key release is the US jobs report for December due out on Friday.

Key themes over the next six months are still COVID-19, high inflation, bottlenecks, a cyclical slowdown and central bank policy.
The 60 second overview

Equities in hindsight: 2021 was a fantastic year for equities with 21% return measured by the MSCI world AC local currency index. However, this came with very big regional differences where US lead the gains by returning almost 30% while China (Hang Seng) lost almost 15%. Energy was the best performing sector last year, returning 44% while utilities was the bottom performer returning 13%. Looking at styles it was interesting to see how momentum was the weakest part, returning only 10% after a massive outperformance back in 2020. Quality, cyclicals and value were the best performing styles in 2021.

A slow start to the year: The year begins as last year ended with many of the same themes carrying over and this week is unlikely to bring much new information to the table. As such, US and European equities are near all-time highs whereas Emerging Markets continue to be wobbly. The key themes over the next six months are still COVID-19, high inflation, bottlenecks, a cyclical slowdown and central bank policy.

The dollar: Amid this stalemate in macroeconomic news, the dollar (EUR/USD) continues its largely sideways move, as we saw during December. In our view, on the one hand, the big-picture strength of US over EM adds to USD-upside but US equities have been quite wobbly over recent weeks as well. The lack of more firm (short-term) trends in relative equities have gone hand-in-hand with mild weakness in the global commodity prices. As the latter has been a key EUR-negative element in recent months, we are starting to see a more sideways and slight upside risk to EUR/USD on days when equities and commodities struggle. Looking ahead, we expect EUR/USD to drop further over the coming quarters.

Equities: Turning the page to 2022, Asian markets are slowing starting up with both Japan and mainland China closed. Rest of Asia showing gains this first trading day of the year, though with Hang Seng being the exemption. Futures in Europe are flat while US futures are showing small gains this morning.

FI: Last year ended with a modest decline in yields as well as stable spreads. The BTPS-Bund spread stabilised around 130bp. We think it is too wide given the positive rating outlook and that the supply of Italian government bonds in 2022 did not surprise on the upside.

FX: EUR/USD moved higher on 31 December and was trading closer to 1.14 than 1.13 at the time of writing. EUR/GBP went briefly below 0.84 on the last trading day of 2021 but is now marginally above. EUR/SEK and EUR/NOK are trading around 10.30 and 10.02, approximately. EUR/DKK traded close to the 7.4360 FX intervention level from earlier last year throughout most of December, but the downwards pressure did ease slightly in the final days of the year.

Credit: Credit markets have seen good performance over Christmas and New Year where iTraxx Xover has tightened 10bp and Main 2.5bp. Hence, CDS indices are now below or close to their September post-roll levels (trading in 242bp and 48bp, respectively). HY bonds have tightened 7bp and IG is unchanged.

Danske Bank
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