Market movers today
Today’s key focus will be the October Flash PMIs. We expect further signs that euro area is sliding towards a recession already this year, while US growth remains modestly positive.
On the political front the UK Conservative MPs will select the two final candidates this afternoon and after Boris Johnson pulled out of the race late last night, Rishi Sunak is firmly on course to become UK’s next prime minister with the deciding online vote on Friday among the Conservative party members.
Later this week, central banks will take over the limelight with Bank of Canada meeting on Wednesday, ECB meeting on Thursday (where we expect it to hike its policy rates by 75bp) followed by the Bank of Japan Friday morning, where it is expected to defend its yield curve control. The US Q3 GDP report on Thursday followed by Germany and Sweden on Friday will also attract market attention.
The 60 second overview
Boris Johnson withdraws from race: This afternoon Conservative members of parliament will select the final candidates to replace prime minister Liz Truss, where candidates must secure the backing of at least 100 MPs out of a total 357 to reach the ballot. If more than one candidate reaches the threshold of 100 backers, the Conservative party members will cast the final deciding vote in an online election set to conclude Friday 28 October. In a turn of events, Boris Johnson pulled out of the race late last night leaving former chancellor Rishi Sunak as the only contender with public backing exceeding the threshold. At present, second runner up Penny Mourdant is far behind. At the time of writing it is in our view reasonable to expect that Rishi Sunak will be the UK’s next prime minister, which will be welcomed by markets given his stance on fiscal discipline. If Mourdant fails to get above the 100 threshold, the announcement of the new PM may thus take place as early as this afternoon.
Chinese markets sink as Xi cements power: Chinese stocks plunged in Monday’s trading following a reshuffle of China’s top leadership that cements president Xi Jinping’s power. Offshore stocks are down more than 5% this morning falling from already low levels. Four new members in the Standing Committee of the Politburo that consists of China’s top seven leaders, were mostly close allies to Xi Jinping. There was also no successor lined up suggesting Xi plans to stay on also after 2027. The result of the Congress thus points to a continuation of the zero-Covid policy, intensifying US-China rivalry and a continuation of an economic path that has caused anxiety among Western investors, see Research China – CPC Congress cements Xi’s power – and US-China rivalry, 24 October. That foreign investors drive most of the move is suggested by a smaller decline in the domestic A-share market (down 1.7% at time of writing).
China data a mixed bag: A range of Chinese data, which was delayed due to the CPC Congress, was released this morning. GDP for Q3 surprised to the upside rising 3.9% y/y (consensus 3.3%, previous 0.4%). Retail sales for September rose a weaker-than-expected 2.5% (consensus 3.0%, previous 5.4%) while industrial production beat expectations being up 6.3% y/y (consensus 4.8%, previous 4.2%). The numbers show that underlying growth is still very weak with consumers hesitant to spend and that the main growth engine now is stimulus, which drives up industrial production as infrastructure is beefed up.
Russia warns of escalation in Ukraine: Russian defence minister Sergei Shoigu warned of an escalation of the war saying that Ukraine could escalate by using a “dirty bomb” (a conventional bomb with nuclear material). The claim was rejected as absurd by Ukraine foreign minister Dmytro Kuleba saying “Russians often accuse others of what they plan themselves”.
Fed pivot or not: On Friday, a Wall Street Journal article by Nick Timiraos suggested that some Fed officials consider moderating the future pace of tightening, which caused markets to pull back on Fed’s rate hike pricing, and supported a rally in risk sentiment. Timiraos was the journalist who Fed likely tipped off about the decision to up the hiking pace to 75bp in June, when both the CPI and University of Michigan consumers’ inflation expectations surprised to the upside during the silent period. While Timiraos has been well informed in the past, the situation is now different as Fed officials had plenty of opportunities to guide the markets last week ahead of the November silent period, which begun on Saturday. In our view, the recent rise in markets’ inflation expectations, only modest tightening in real financial conditions and high spot core CPI suggest that Fed is not yet in a good position to ‘pivot’ verbally. For now, we stick to our call of two more 75bp hikes in the last meetings of the year, but if Fed prefers to slow the hiking pace in December, we could see the cycle extending into 2023.
Italy new government: Giorgia Meloni was sworn in as Italy’s first female prime minister. The important finance ministry went not to a technocrat, but to League member Giancarlo Giorgetti, which could create some fiscal sustainability concerns, as the League is also advocating tax cuts and a bigger deficit to support the economy. However, Giorgetti was also part of the previous Draghi government and hails from the more moderate, business-friendly wing of the party. The awarding of the foreign ministry to Forza Italia’s second in command Antonio Tajani leaves some question marks on the coalition’s Russia stance after Berlusconi’s contentious Ukraine comments during the last days. League leader Matteo Salvini will also be part of the government as infrastructure minister and together with Tajani serve as deputy PM.
With ongoing internal power struggles, we expect the parties’ collaboration to be volatile, leaving the risk of occasional market jitters. Especially any signs of fiscal profligacy or slackening in the reform pace that could endanger continued NGEU disbursements and/or ECB TPI activation will be seen as warning bells by markets. After securing a confidence vote in both chambers of parliament during this week, the first big hurdle of the new government will be agreeing and passing the 2023 budget before year-end, while also dealing with the economic fall-out of the energy crisis and maintaining a united EU front against Russia.
Equities: Equities rallied into the close of the US cash session on Friday and hence ended sharply higher not just Friday but for the week. Once again equities were driven by yields and the turnaround in yields half way through the Friday cash session was a big catalyst for the gains. No surprise to see cyclicals leading the gains but worth highlighting all sectors were higher. Dow +2.5%, S&P 500 +2.4%, Nasdaq +2.3% and Russell 2000 +2.2%.
The rally on Wall Street Friday continues in most of China this morning with Chinese stocks being a big exemption. Hang Seng is down 5% at the time of writing as a sign of investors’ aversion against Xi Jinpings increased power and the delayed GDP figures. US and European futures are higher this morning.
FI: It was another dramatic week in the global fixed income markets with global yields rising. 10Y US Treasuries tested the 4.3%-level and 10Y German government bond yields tested the 2.5%-level as the global central banks continue to tighten monetary policy.
FX: MoF/BoJ made new FX interventions on Friday which sent USD/JPY significantly lower, but part of the losses were soon erased. Sterling gained while the political landscape seems to shift in favour of Rishi Sunak. Scandies ended last week in tight links with risk sentiment.
Credit: Credit spreads moved only marginally on Friday where iTraxx Xover tightened 1.3bp while Main widened 0.2bp.
No key movers in the Nordics today. In Sweden we get consumer and business surveys on Wednesday and GDP on Thursday. Norway releases data on unemployment Wednesday and retail sales Thursday.