Market movers today
The German ZEW index should give more insights into the severity of the downturn in the euro area. It has proven a good leading indicator in this cycle as PMI’s have tended to follow it with a short lag. The expectations index in July hit the lowest level since 2011 highlighting the risk of recession and with the recent further headwind from higher electricity prices it may not improve in August.
UK releases its labour report with data on unemployment and wage growth. Especially the latter is a key input to the inflation picture.
US housing starts probably dropped further in July as home sales has declined sharply and inventories of new homes have moved a lot higher lately. US industrial production figures are also due today.
The 60 second overview
The risk of recession continues to weigh on the markets as yields and commodity prices decline. Central banks apart for from that of China continue to focus on bringing down inflation, while more indicators show a risk of a recession. More and more forecasters are seeing a risk of a hard landing rather than a soft landing for the US economy, and in Europe the risk of stagflation is increasing.
The oil price has dipped below USD 90 and this is likely to be related to Iran and US getting closer to deal a deal on oil exports. A deal which should be supportive for lower oil prices.
We have several key numbers today, first the German ZEW indicator and later the UK labour market report as well as US housing market data and industrial production.
Equities: Global equities higher yesterday in a defensive growth and quality rotation. The stagflation winners are energy, materials and financials underperforming and hence everything at first glance looking okay and in line with our strategy. However, the rotation came on the back of plunging macro data, increasing the risk of recession significantly. Hence, we would have argued this rotation should happen with sharply negative equity markets and increasing volatility. Yes, Min Vol outperformed yesterday but to no extent as much as expected given the set of data we got yesterday. There is still a lot of buying on the back of lower inflation expectations and the dropping volatility. However, it is a matter of time before that ends if key figures continue to deteriorate at yesterday’s pace. In US yesterday, Dow +0.5%, S&P 500 +0.4%, Nasdaq +0.6% and Russell 2000 +0.2%. Asian markets are higher this morning and the same goes for European futures. US futures are slightly lower.
FI: Global bond yields decline as the risk of a hard landing is increasing in both the US and Europe. Yesterday, 10Y German government bond yields fell almost 10bp. The US market also saw declines in the bond yields and modest bullish steepening between 2Y and 10Y.
FX: USD strengthened broadly yesterday as US economic data hints at a further slump in manufacturing.
Credit: Yesterday, credit markets were relatively uneventful with one primary deal in GBP leaving ITraxx Main unchanged (+0.3bp) to close at 92.2bp, while Xover widened 1.4bp to close at 464bp.
