HomeContributorsFundamental AnalysisThe Global Sell-off Continues

The Global Sell-off Continues

Market movers today

Today’s key data release will be the Euro Area September Flash HICP, where yesterday’s upside surprise in the German figures has likely tilted the risks towards a larger-than-expected uptick, read more below. From the US, August Private Consumption Expenditures are due for release, data released earlier points towards modest but still positive growth in real consumption.

Today, Russia is expected to announce annexation of the four regions in Eastern Ukraine following the staged referendums over the past week – a move which has been widely condemned by western leaders. Focus remains on whether Russia aims to use even harsher methods to defend the controlled areas, as Ukraine has continued to reclaim control of areas in the northern part of the Donetsk region.

On the central bank front, ECB’s Schnabel as well as Fed’s Barkin, Brainard and Williams will be on the wires today.

The 60 second overview

The global sell-off in the financial markets continued in Asia this morning given the higher interest rates and the increased prospect of a global economic recession on the back of the turmoil in Europe. There is rising pressure on the UK government to change the fiscal package and looking at a recent poll, Labour has an historical high lead of 33% in the poll against the government. So far there has been no change to credit rating or outlook to UK government bonds, but Moody’s has warned the UK government that it would be credit negative if they go ahead with large unfunded tax cuts.

The Federal Reserve continues to be very hawkish despite the looming recession in the US economy. Fed’s Mester stated yesterday that a recession would stop the Federal Reserve from hiking rates. Fed’s Daly stated that they should avoid a deep recession.

Today, we will get the Eurozone inflation flash print and after the surprise in the German inflation data there will be plenty of speculation regarding the high inflation and response from ECB given the speech later today from ECB.

German inflation surprised on the upside and rose from 7.9% to 10.0% in September, the highest level since December 1951. Although the inflation jump was largely due to the expiry of energy relief measures introduced in June, underlying inflation pressures are also still building, despite the weakening demand environment. An ongoing steep rise in food price inflation provides a cautionary tale that a normalisation in commodity prices remains a necessary, but not sufficient condition to get consumer prices down. We doubt that we have seen the inflation peak, as the latest increase in energy commodity prices has yet to pass through to consumers. If anything it will be up to governments to limit inflation pressures in the near-term. Yesterday the German government announced another EUR 200bn aid package (5.5% in % of GDP), financed through new borrowing and channelled through the Economic Stabilisation Fund (WSF), to cap gas and electricity prices. However, we doubt that it will be enough to prevent the German economy falling into recession in H2 22.

German ASW-spreads tightened modestly on the back of the new plan even though the funding is expected be done by the Economic Stabilisation Fund (ESF). Germany has previously done something similar after the financial crisis, where it bailed out HypoVereinsbank and WestLB through FMS Wertmanagement and EEA. Here the government debt jumped almost 10% from 73% to 82% of GDP. Currently, the debt is at 69% of GDP.

Equities: The positive blip in equities on the back of BoE Wednesday was not long lasting and equities back on their heels yesterday. As expressed by the VIX north of 30 and MOVE around 150, uncertainty is elevated and currently fuels from so many angles. Massive monetary tightening, crisis management QE, war, energy crisis, utility crisis, recession risk and financial stability risk, just to mention some of the hottest topics that all have been market driving with the last two weeks. We typically spending 90% of the time discussing marginal changes in macro data and being nitty gritty data. However, right now, even some tier 1 macro data are being disregarded by investors because there are so many other challenges to try to understand. Rising uncertainty is never good for equities. In US, Dow -1.5%, S&P 500 -2.1%, Nasdaq -2.8% and Russell 2000 -2.45%. The only sector in green was energy but besides that investors are still running for shelter in Min Vol, quality, defensives with health care and consumer staples being the two go to sectors in the current turmoil. The Asian market was a victim of Europe and Wall Street. Hence, it was no surprise to see them lower this morning. Marginally positive story to see South Korea showing a minor gain at times of writing. US and European futures a tad lower this morning.

FI: It was again a very volatile day in the global bond markets. The 10Y German govt yield traded between 2.20% and 2.30% before ending at 2.20%. A similar trading pattern was seen in 10Y Treasuries, which traded between 3.75% to 3.95%. Hence, the volatility remains in the market given the uncertainty about the terminal rate, QT, fiscal stimulus packages as well as the poor market liquidity.

FX: In a rare occasion, GBP and EUR both outperformed the rest of G10 currencies yesterday. EUR/USD touched 0.98 and EUR/GBP slipped below 0.89 again. Aside, USD/JPY still trades close to the 145 level that prompted FX intervention last week.

Credit: As risk sentiment was under pressure yet again, credit spreads resumed their widening trend with iTraxx Main wider by 3bp to 138bp and Crossover by 12bp to 662bp.

Nordic macro

The tight labour market is obviously an important factor in Norges Bank’s aggressive policy rate signals, and NB is unlikely to change course until the labour market cools. Today’s unemployment data for September could therefore be crucial, and we anticipate a slight increase in the jobless rate to 1.7% (seasonally adjusted). This is due to a clear slowdown in economic growth causing demand for labour to soften somewhat, albeit from high levels. If proven right, this will be exactly in line with NB’s estimate from the latest MPR.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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