Market movers today
We start the week in a quiet fashion, with Danish November inflation figures the data highlight in Scandinavia today. We expect a decline in Danish CPI inflation in November to 9.7% from 10.1% in October on the back of lower energy inflation.
Later this week, central banks will take the market focus, with the Fed meeting on Wednesday, followed by ECB, Bank of England and Norges Bank on Thursday. Amid high inflation pressures, further rate hikes are on the agenda this week, but markets will likely take their cue from the rate guidance for 2023.
The 60 second overview
Market sentiment: Markets remain in a wait-and-see mode ahead of the flurry of central bank meetings later in the week. Stock markets are down in Asia after media reported chaos around many Chinese hospitals as a result from easing of pandemic curbs. European stock market futures also point towards a weaker opening. In line with a weaker risk sentiment and overall dollar strength, EUR is a tad weaker against USD this morning at around 1.051. See our previews for ECB and Fed from last week: Research Euro area: ECB preview – A hawkish 50bp, 8 December, and Research US: Fed preview – Tightening pressure to persist into 2023, 8 December.
BOE preview: We expect the Bank of England (BoE) to hike the Bank Rate by 50bp on 16 December bringing it to 3.50%, see Research UK: Bank of England preview – Back to 50bp as BOE nears end of hiking cycle, 12 December. Markets are currently pricing slightly above 50bp for the meeting next week (55bp). As a result of a more balanced fiscal policy, market conditions have cooled off and broadly returned to conditions we saw prior to the mini-budget. We thus expect a return to a slower hiking pace.
UK: While market turbulence in the UK has eased, the country is now heading into a new kind of chaos as strikes are planned for almost every day for the rest of the month affecting hospitals, public transport and postal services. Unions are demanding inflation-matching wage increases while the government is offering them 5%. The most wide-spread union protests since the 1980s are expected to cause disruption for millions of people in the middle of the busy Christmas season.
Ukraine: In an effort to secure international support ahead of the coldest and darkest winter time, Ukraine’s President Zelenskyi talked to US, French and Turkish leaders yesterday over phone. In an assuring note, US Treasury Secretary Janet Yellen pledged that support for Ukraine’s military and economy would continue “for as long as it takes”. Meanwhile, Kremlin is showing no sign of backing off. Yesterday, Russian forces used Iranian-made drones to target two energy plants in Odesa, leaving 1.5 million people without electricity in the country’s south.
Equities were lower on higher yields and hotter inflation data on Friday. So, it is still apparent in markets that inflation is the governing factor while earnings is secondary. Yet, note that defensives outperformed – not value – despite hotter inflation which is a difference from the past quarter. Communications, real estate and financials closed around the zero line while mainly industrials, materials and energy sold off. S&P 500 closed down -0.7% and -3% for the week. This weakness correlates well with the positioning support that ran out last week when VIX moved higher. Hence, the ones arguing for a bear market rally driven by positioning – including us – are so far correct.
FI: It is going to be a very busy week in terms of central bank meetings as we have the Federal Reserve, ECB, BoE, SNB and Norges Bank meetings this week. The Federal Reserve is meeting on Wednesday, and the consensus expectation is for a 50bp rate hike. ECB, BoE, SNB and Norges Bank are all meeting on Thursday, and we expect 50bp from ECB, BoE and SNB, respectively and finally 25bp from Norges Bank.
This is fully priced in and should not have much impact on the global financial markets. The interesting part will be how much the central banks will continue to hike after meetings on Thursday – will they signal a pivot or just continue to stress the need for rate hikes despite the looming recession.
FX: EUR/USD starts the week off around 1.05, having traded as high as 1.06 early last week. In Scandie space, the 10.90-level remains the centre of gravity for the SEK whereas the NOK lost 1% against the EUR last week. Muted trading in the GBP amid mixed markets.
Credit: Credit markets ended the week on a positive note. iTraxx main tightened 2.9bp to close at 89.1bp and iTraxx crossover tightened 14.7bp to close at 455.3bp. Primary markets however, saw very little activity despite the positive tone in secondary markets.