Market movers today
There are no major releases today, so attention will turn to the string of central banks meetings coming up this week, starting with Riksbanken tomorrow, followed by the Fed (Wednesday) and Bank of Japan, Bank of England, Swiss National Bank and the Turkish central bank on Thursday.
Also, in focus will be the preliminary PMIs on both sides of the Atlantic on Friday.
The 60 second overview
Markets: The week kicks off in a risk-off mode as markets brace themselves for a flurry of central bank meetings ahead. It should be a rather quiet day with thin trading as Japan and UK are off, with the latter observing a day of mourning for the late Queen Elizabeth II. All eyes are on Wednesday’s Fed meeting with investors considering a 75bp hike a done deal and some calling for an even larger hike. A poll for leading academic economists by Financial Times found that the Fed was expected to lift its policy rate above 4% and hold it there beyond 2023. See our Research US – Fed preview: Fast pace hiking cycle continues, 16 September.
Hungary: Yesterday, the EU commission said that it plans to withhold EUR 7.5bn in EU funding for Hungary (or a third of the country’s total EU funds) over rule of law violations involving corruption in the awarding of public contracts. The decision to withhold the funds must be approved by a majority of the EU’s member states, excluding Hungary, within a month but the deadline could be extended up to two months “in exceptional circumstances”. Hungarian authorities said yesterday that they plan to pass a series of laws this week to address EU concerns. Yesterday’s decision by the EU Commission is likely to put pressure on the HUF today.
Geopolitics: In the last seven days, two conflicts have erupted in Russia’s neighbourhood: an expanded version of the Nagorno-Karabakh conflict between Azerbaijan and Armenia, and a border conflict between Tajikistan and Kyrgyzstan. These conflicts may have broader long-term geopolitical repercussions as Russia seems to be taking a more and more hands-off approach when it comes to protecting its post-Soviet allies. The Azerbaijan-Armenia conflict last escalated in 2020. Back then, the war resulted in Russia-brokered ceasefire and in Azerbaijani victory. Turkey’s material support to its neighbouring Azerbaijan also played a game-changing role in the conflict. The latest conflict seems like the second time, Armenia, a member of the CSTO, an intergovernmental military alliance for post-Soviet states, is being left without any support from Russia. Same time, US flags were hoisted over the weekend as House Speaker Pelosi paid a visit to Armenia’s capital Yerevan, strongly condemning Azerbaijan’s attack. Similarly, Russia seems to pay little attention to the border clash between two CSTO members, Tajikistan and Kyrgyzstan, in Central Asia, implying that it either has little resources or motivation (or both) at this point to promote peace and stability in the region, and protect its so-called allies.
Equities: Inflation fear and recession fears continue to switch gears. On Friday, the latter one took the lead. Positive inflation data combined with Fedex’s profit warning underlined the shift. Defensives and growth sectors took the lead (such as staples, health care but also tech) while energy, industrials and materials sold off 2%. Dow -0.5%, S&P 500 -0.7%, Nasdaq -0.9% and Russell 2000 -1.5%. Futures are somewhat lower this morning too.
FI: It is going to be a busy week in terms of central bank meetings with the main focus on the Federal Reserve on Wednesday and the possibility of a 100bp rate hike by the Federal Reserve. However, we begin in Sweden with the Riksbank, where 75bp is fully priced in. Furthermore, we have Bank of England, Bank of Japan and the Swiss central bank. We expect that there will be one common factor for all of the central banks, and this is “frontloading” of tighter monetary policy in order to bring down inflation. This should lead to flatter curves 2-10Y and 2-5Y as well as a stronger dollar.
FX: Major G10 crosses ended last week on a quiet note with EUR/USD firmly stuck at parity. USD/JPY remains off peak after BOJ’s ‘rate check’. SEK, NOK and GBP continued to trade lower vs EUR and USD as equities closed the week in red. All eyes on all the central bank decisions especially the Fed – but also the two Scandies.
Credit: Credit markets ended the week in risk off mode as investors continued to weigh uncertainty from hawkish central banks and stubborn inflation. Itrax main widened around 4bp to close at 112bp, while Itrax Xover widened 17bp to close at 552bp. Primary market activity was relatively muted on Friday.