U.S. futures rose again, starting the Santa rally predicted over the weekend by Goldman, after the underlying index surged to a record on Friday with risk appetite returning ahead of this week’s barrage of central bank meetings including the Fed on Wednesday, followed by the Bank of England and ECB. Nasdaq 100 futures climbed 0.4% as major technology and internet stocks rose in premarket trading with Apple inching closer to a $3 trillion market valuation; S&P 500 futures rose 11 points or 0.2%; with Dow Jones futures also rising 0.2%.
Chinese developers’ bonds and shares experienced a wave of selling after the sudden plunge in Shimao Group's notes restarted concern over the health of the sector 10-year Treasury yields inched lower to 1.4684% and the dollar pushed higher. Bitcoin extended losses toward $48,000 as Binance bailed on plans for a Singapore exchange. Traders pared bets that the BOE will raise rates next year as concerns over fresh Covid restrictions outweighed inflation fears.
Risk sentiment got a boost from predictions China will start adding fiscal stimulus in early 2022, said Ipek Ozkardeskaya, a senior analyst at Swissquote. “The chances of a massive hawkish surprise are limited, and the actual expectation doesn’t interfere with equity investors’ craving for a Santa rally to close a record-breaking year with one last record,” she wrote. Indeed, as we have been expecting for much of the past 6 months, China’s top decision makers last week signaled policies may become more supportive of growth next year. Economists predict China will start adding fiscal stimulus in early 2022.
US stocks close Friday at a new record after in-line inflation data did not surprise to the upside for the first time in months and spurred bets that the Federal Reserve won’t have to accelerate plans to tighten monetary policy. That came amid a backdrop of uncertainty from the omicron coronavirus variant, a factor that traders are likely to also monitor closely as the week starts. Volatility should remain high as several central banks will decide on interest rates this week, Pierre Veyret, a technical analyst at ActivTrades, said in written comments. The “policies should set the trading tone, providing investors with more clues on next year’s investing environment.”
The Federal Reserve on Wednesday is expected to speed up stimulus withdrawal and perhaps open the door to earlier interest-rate hikes in 2022 if price pressures stay near a four-decade peak. After repeated jawboning, it would be a major surprise if the bank doesn't announce a faster tapering, and the bond market will have to adapt to the new approach.
“Global equities had a solid run last week and we’ll see if the goodwill lasts into what is a behemoth when it comes to event risk,” Chris Weston, head of research with Pepperstone Financial Pty Ltd., wrote in a note. Omicron and the Fed should dictate sentiment, he added.
Meanwhile, in the world of covid, at least 30 U.S. states have reported omicron cases, with Anthony Fauci of course stepping up calls for boosters to increase protection and making pharma CEOs even richer. That said, all cases for which there's available information were asymptomatic or mild, European health chiefs said. That did not stop Boris Johnson from warning that the U.K. faces a tidal wave of infections and set a year-end deadline for its booster program. South Africa's Cyril Ramaphosa tested positive.
Here are some of the biggest U.S. movers today:
- Arena Pharmaceuticals soars after Pfizer agrees to buy it for $100/Shr in Cash
- Apple shares rose 1%, leaving the stock close to hitting $3t market capitalization if the move holds.
- Airbnb, Lucid, Zscaler and Datadog shares all rise in U.S. premarket trading with the companies set to be added to the Nasdaq 100 index later this month.
- Peloton Interactive shares gain after the home-exercise firm put out an advert responding to a scene in the TV show “And Just Like That...” where a character dies using its product. The stock closed 5.4% lower on Friday, the day after the episode aired.
- TherapeuticsMD fell 25% in premarket trading after the FDA said it couldn’t approve revisions to some manufacturing testing limits for the Annovera birth-control ring requested by the company through a supplemental new drug application.
European stocks also advanced, led by technology and mining stocks. The Euro Stoxx 50 rose as much as 1%, DAX outperforming at the margin. In the U.K., traders are paring back bets on Bank of England rate hikes over the next year as concerns over fresh Covid restrictions outweigh inflation fears.
Asian stocks erased an early advance as deepening losses in shares of Chinese property developers and persistent concerns over the omicron coronavirus variant soured sentiment. The MSCI Asia Pacific Index was down 0.2% after having climbed as much as 0.8%. Equity benchmarks in India and South Korea led regional declines. While stocks in China and Hong Kong rallied in morning trade on signals policies may become more pro-growth next year, the Hang Seng Index erased a gain of as much as 1.6%. That was owing to a selloff in real estate names after a plunge in the bonds and shares of Shimao Group sparked renewed concern over the health of the sector.
Monday’s trading in Asia also highlighted investor caution as markets confront potential economic risks from omicron’s spread and a series of central bank meetings this week, including the Federal Reserve. The Fed on Wednesday is expected to speed up stimulus withdrawal and perhaps open the door to earlier interest-rate hikes in 2022 if price pressures stay near a four-decade peak. “We are in the last three weeks of the year -- no investor is going to place new bets and are more likely to be taking profits off the table,” said Justin Tang, head of Asian research at United First Partners. “Any negative news will be taken as a reason to press the sell button.” Meanwhile, China’s stocks climbed for the fourth day in five after the nation’s annual economic conference ended Friday with a vow to ensure “stability” and “front load” policies. Foreign investors on Monday added to record purchases of mainland shares last week. Focus now shifts to data due later in the week, including industrial production, retail sales and fixed-asset investment.
India’s benchmark stock index dropped, with a fall in Reliance Industries Ltd. weighing on the market. The S&P BSE Sensex slipped 0.9% to close at 58,283.42 in Mumbai, reversing gains of as much as 0.7%. The index had posted its best weekly performance since mid-October on Friday. The NSE Nifty 50 Index also fell 0.8% on Monday. Still, a measure of small-cap companies gained 0.2%. Reliance, the nation’s most valuable company, dropped 2%. Out of 30 shares in the Sensex, 23 fell and seven rose. All but one of the 19 sector sub-indexes compiled by BSE Ltd. declined, led by a gauge of energy companies. “Selling is more evident in benchmark indices as overseas investors are booking at least a part of their profits ahead of the U.S. Fed’s rate-setting meeting that is likely to speed up the policy normalization process,” Abhay Agarwal, founder of Mumbai-based Piper Serica Advisors Pvt., an investment management company with assets of 5 billion rupees under management, said by phone. The Fed.’s policy announcement is due Wednesday, where it is expected to speed up stimulus withdrawal and perhaps open the door to earlier interest-rate hikes in 2022. “Post-event, we expect to see a reallocation, though at a slower pace as FPIs will factor in the possible hike in interest rates, apart from the tapering of stimulus,” Agarwal said. Locally, the government will release its consumer inflation print for the month of November later on Monday. Inflation likely rose to 5.1% year-on-year in November from 4.5% in the previous month, according to a Bloomberg survey.
Fixed income drifts higher with bund and UST curves bull flattening. Treasury yields were lower as the U.S. trading day begins, with the 10Y sliding to 1.46% and short-term little changed, prolonging the curve-flattening trend. With no U.S. economic data slated and Fed speakers silent ahead of Wednesday’s policy meeting, supply is a focal point, and Fed is slated to buy long-end sectors with no coupon supply until next week’s 20-year reopening. 10- to 30-year yields lower by about 1bp-2bp, 10-year by 1.5b at ~1.468%; 2- to 5-year yields little changed, narrowing 2s10s and 5s30s by 1bp-2bp.Peripheral spreads tighten slightly with short-dated BTPs leading a cautious move higher. Gilts bull steepen, trading ~2.5bps richer across the short end as money markets continue to price out hikes in light of the latest Covid restrictions.
In FX, Bloomberg Dollar index drifts 0.3% higher, erasing Friday’s decline and rallying against all its peers with the focus on Wednesday’s Federal Reserve meeting amid speculation officials might accelerate the pace of policy normalization. Flows in the spot market are running at 70% of the recent average, a Europe-based trader told Bloomberg. Volatility term structures in the major currencies remain inverted as the market awaits forward guidance that could shape trading for the better part of 2022 U.S. inflation data in line with expectations on Friday “almost certainly won’t change the balance-of-risk assessment for the Fed, and the communications of late expressing concern over inflation risks remain valid,” says MUFG’s Derek Halpenny. “The week starts quietly in terms of data today but it remains likely that the dollar will remain supported into the FOMC on Wednesday with anticipation high of some hawkish rhetoric to accompany the decision to speed up QE tapering.”
GBP/USD fell 0.2% to 1.3244 after gaining 0.5% over the previous two sessions. The Bank of England is set to opt for caution over Covid rather than worries about inflation, pushing back its first rate increase since the pandemic into 2022, according to economists. U.K. Health Secretary Sajid Javid said there’s no certainty the government will be able to keep schools in England open, as it battles to contain the spread of the omicron Covid-19 variant. “This week is interesting for GBP as markets scrutinize labor-market report tomorrow ahead of BOE,” said Christopher Wong, senior foreign-exchange strategist at Malayan Banking Bhd. in Singapore. “There are concerns unemployment will spike if workers are made redundant or if people cannot find jobs, and this labor report will provide the first assessment.”
The Yen outperformed amid broad dollar strength; USD/JPY still up 0.2% at 113.69. AUD and NOK are the weakest in G-10. Turkish lira crashed again, plunging to a new record low in early London trade with USD/TRY initially rallying over 6% to highs of 14.7590, before fading some of the move after another intervention from the Turkish central bank.
In commodities, crude futures give back Asia’s gains; WTI is little changed near $71.78, Brent dips below $75.50. Spot gold holds a narrow range near $1,785/oz. Most base metals are in the green with LME aluminum outperforming. Bitcoin once again failed to rise above $50,000, extending losses toward $48,000 as Binance bailed on plans for a Singapore exchange
There are no major economic developments on today's calendar, but it's a busy week with about 20 central banks making monetary policy announcements, including the Fed, the BOE and ECB, and the divergence of their paths will be evident. Jerome Powell may turn more hawkish as he fights rising inflation, while the ECB joins China in leaning dovish and playing down soaring prices.
- S&P 500 futures up 0.4% to 4,728.00
- STOXX Europe 600 up 0.7% to 478.82
- MXAP down 0.2% to 193.62
- MXAPJ down 0.3% to 630.93
- Nikkei up 0.7% to 28,640.49
- Topix up 0.1% to 1,978.13
- Hang Seng Index down 0.2% to 23,954.58
- Shanghai Composite up 0.4% to 3,681.08
- Sensex down 0.9% to 58,278.65
- Australia S&P/ASX 200 up 0.4% to 7,379.26
- Kospi down 0.3% to 3,001.66
- Brent Futures up 0.8% to $75.74/bbl
- Gold spot up 0.1% to $1,784.20
- U.S. Dollar Index up 0.34% to 96.42
- German 10Y yield little changed at -0.36%
- Euro down 0.4% to $1.1265
Top Overnight News from Bloomberg
- Almost 20 central banks meet this week, including the world’s biggest. No surprise that volatility term structures in the major currencies remain inverted as the market awaits forward guidance that could shape trading for the better part of 2022
- The Bank of Japan offered to buy 2 trillion yen ($17.6 billion) of government bonds under repurchase agreements after repo rates jumped to a two-year high
- Turkey’s central bank intervened in the market by selling FX after the lira tumbled past 14 to the dollar for the first time, piling pressure on a central bank that’s forecast to keep cutting interest rates this week despite rising inflation. The decline came after S&P Global Ratings lowered the outlook on the nation’s sovereign credit rating to negative on Friday, citing risks from the “extreme currency volatility”
- The ECB’s biggest decision this week is to decide if it can still call the current inflation spike “transitory.” The answer will have a huge bearing on the euro-area economy, which is already dealing with resurgent coronavirus infections, new restrictions and lockdowns, and uncertainty about the omicron variant
- ECB Vice President Luis de Guindos is self-isolating after testing positive for Covid-19 on Saturday, the ECB said in a statement posted on its website. Guindos hasn’t been in close contact with ECB President Christine Lagarde over the past week, according to the statement. The Spaniard, who is double- vaccinated and has very mild symptoms, will work from home until further notice
- Two doses of the Pfizer Inc. and AstraZeneca Plc. vaccines induced lower levels of antibodies against the omicron variant, increasing the risk of Covid infection, according to researchers from the University of Oxford.
A more detailed breakdown of overnight news from Newsquawk
Asia-Pac equity markets took their cues from last Friday’s gains on Wall Street where the S&P 500 notched a fresh record close and its best weekly performance since February, with markets now bracing for a risk-packed week including a busy schedule of central bank meetings. The ASX 200 (+0.4%) traded higher with risk appetite supported by the reopening of Australia’s borders to international students and skilled workers from Wednesday, while the government will also partially underwrite up to AUD 7bln in new loans for small businesses impacted by lockdowns. The Nikkei 225 (+0.7%) benefitted from the mild outflows from the JPY, with the index unphased by mixed Tankan and Machinery Orders data in which the Tankan Large Manufacturers Index and Outlook missed expectations but sentiment among Large Non-Manufacturers and Small Manufacturers improved for the sixth consecutive quarter. The Hang Seng (-0.2%) and Shanghai Comp. (+0.4%) predominantly conformed to the upbeat mood amid economists' expectations for China to add fiscal stimulus from early next year following last week’s conclusion to the Central Economic Work Conference, which noted that China's economy faces shrinking demand, supply shock, and weakening expectations but added that economic operations are to be kept within a reasonable range. Alibaba shares were among the biggest gainers in Hong Kong as it extended its rebound from YTD lows. Finally, 10yr JGBs were rangebound with March futures contained by resistance at the key 152.00 level and amid the positive mood across riskier assets, although JGBs were off the lows seen late last week where there were source reports that the BoJ is likely to scale back its pandemic relief programs in March with a potential announcement as early as this week’s meeting.
Top Asian News
- Shriram Units Merge to Form Largest India Retail Financier
- Intel to Spend $7 Billion on Big Malaysia Chipmaking Expansion
- Shimao Group Appoints Xie Kun as Executive Director
- Daimler Reveals Chinese Partner BAIC Raised Stake to Almost 10%
Stocks in Europe have continued to gain since the cash open (Euro Stoxx 50 +1.0%; Stoxx 600 +0.5%) as the APAC sentiment reverberates through the region following a fleeting blip lower in early European trade. US equity futures are also firmer but to a lesser magnitude – with the RTY (+0.3%) narrowly outpacing the ES (+0.%), NQ (+0.4%) and YM (+0.2%). Focus this week will be on the slew of central bank updates which kicks off with the FOMC on Wednesday, followed by the BoE and ECB on Thursday - with Flash PMIs, Christmas liquidity and Quad Witching also part of this week’s concoction. Add to that the potential tail-risk from geopolitics and headline risk from COVID. Nonetheless, European cash markets at the moment seem unfazed by what’s ahead. Sectors are pro-cyclical with Basic Resources and Autos topping the charts, whilst the defensive Healthcare, Telecoms and Personal & Household goods reside at the bottom. A recent Citi note suggests that rising earnings should keep European stocks moving higher and offset expansive valuations and tightening monetary policy in the US. Citi targets some 9% upside for the Stoxx 600 next year, with a target of 520 (vs current c.477), whilst 12% upside is targeted in the FTSE 100 to 8,200 (vs current c. 7,303). Citi leans in favour of cyclicals vs defensives - with overweights in Banks, Insurance, Basic Resources, Industrials, Media, Luxury Goods and Chemicals. Citi is underweight Utilities, Telecoms, Food & Beverages, Personal Care, Travel, Autos and Financial Services. The bank has also added to its focus list: AstraZeneca (+0.1%), Aviva (+0.7%), Capgemini (+1.2%), Faurecia (+0.9%), Iberdrola (-0.3%), Lloyds (-0.7%), Prosus (+1.5%), Royal Mail (+1.6%), Sanofi (Unch), Tesco (+0.4%), UBS (+0.2%), Vodafone (Unch), Volvo (+1.1%). Separately, Goldman Sachs sees muted returns for global stocks next year amid negative real rates coupled with high equity risk premia and in the absence of a growth shock. GS suggests that risks are growing in the US on a relative basis and sees a maximum drawdown of between -5 to -10% over the next 12 months.
Top European News
- European Gas, Power Prices Surge on Nord Stream 2 Worries
- U.K. Says Can’t Rule Out Shutting Schools as Omicron Spreads
- UBS Global Wealth Management Discontinues USDTRY Coverage
- Vivendi Has ‘Never Been a Threat’ to Lagardere: Arnaud Lagardere
In FX, the Greenback has clawed back all and a bit more of its post-US inflation data losses, partly on reflection perhaps that the CPI prints were broadly in line, and actually a tad above consensus in terms of the m/m headline rate, so highly unlikely to derail the Fed from upping the pace of QE tapering this week and probably won’t deter the more hawkish FOMC members from pencilling in a steeper lift-off. Hence, having ended Friday’s session fractionally below a Fib retracement level (96.098), the index subsequently eclipsed the intraday peak (96.429) to turn what was a bearish technical close into a constructive start to the new week within a 96.080-450 range and a ‘close’ above 96.500 would be deemed positive, if not bullish.
CHF/EUR/AUD - Very little traction from latest signs of building inflation pressure in the Eurozone via German wholesale prices reaching a record high 16.6% y/y in November, but the Euro has held above 1.0400 against the Franc in wake of latest weekly Swiss sight deposits showing a rise in domestic bank balances. Meanwhile, the single currency has absorbed some stops triggered on a breach of 1.1265 vs the Buck and could derive underlying support from decent option expiry interest at 1.1250 (1.5 bn) at the base of a band extending to 1.1320 (2 bn) through 1.1270-1.1300 (1.1 bn), and Usd/Chf is hovering around 0.9250 at the upper end of a 0.9257-00 band ahead of producer/import prices on Tuesday. Elsewhere, the Aussie has not been able to benefit from good news in the form of Australia opening its borders to international students and skilled workers from Wednesday, Government plans to partially underwrite up to Aud 7 bn new loans for small businesses impacted by lockdowns, or buoyant risk appetite, as it straddles 0.7150 against its US counterpart.
JPY/NZD/CAD/GBP - Also conceding ground to their US peer, with the Yen back below 113.50 and hardly helped by mixed Japanese macro releases including December’s Tankan survey and October machinery orders, while the Kiwi is back under 0.6800 even though NZ PM Ardern said the COVID-19 alert level for Auckland is to be eased on December 30 and the next review is scheduled for January 17. The Loonie is slipping alongside WTI between 1.2753-06 parameters and Cable has tested Fib support into 1.3200 at 1.3200 amidst ongoing UK political furore over Conservative Party transgressions during lockdown last year and heightened Omicron restrictions to prevent a tidal wave of infections.
In commodities, WTI and Brent front-month futures have been drifting lower since the European morning after the former tested USD 73/bbl to the upside and the latter briefly topped USD 76/bbl. Newsflow for the complex has been light but there have been further positive omens regarding the Iranian nuclear talks - Iran’s top nuclear negotiator said good progress was made in nuclear talks and can quickly pave the way for serious negotiations, whilst Russia's Deputy Foreign Minister said they have reason to anticipate some progress. That being said, we are yet to hear from some of the western nations. Meanwhile, on the OPEC front, Iraq’s Oil Minister said he expects OPEC to maintain its current policy of gradual monthly increases of 400k BPD at the next meeting – slated for early January. On the COVID front, the UK opted not to further tighten restrictions over the weekend but instead boosted the booster programme, whilst reports surrounding the Omicron variant have all highlighted a mild illness. The geopolitical space may require some more attention as tensions remain high on the Ukraine/Russia and Taiwan/China front, with the US involved in both. Russian Deputy Foreign Minister, according to reports this morning, said if the US and NATO do not provide them with guarantees around security, it may lead to confrontation – and emphasised that the lack of progress on this would lead to a military response. Further, there were reports that Saudi Arabia and Iran held security talks. Ahead, the monthly OPEC oil market report is due to be released, but focus this week will likely remain on the slew of central bank meetings. Elsewhere, spot gold and silver are constrained to recent ranges ahead of a risk-packed week, with the former still in a purgatory zone below its 50 DMA (1,789/oz), 200 DMA (1,793/oz) and 100 DMA (1,795/oz). Meanwhile, LME copper is firmer on the mild market optimism but has receded south of the USD 9,500/t mark.
US Event Calendar
- Nothing major scheduled
DB's Jim Reid concludes the overnight wrap
We had our first Xmas lunch yesterday with my golf club hosting Santa (arriving on a golf buggy up the 18th fairway) and welcoming kids to the dinning room. I spent the whole lunch worrying their behaviour would get me black balled and banned from golf. Before we went my wife and I took lateral flow tests and Maisie asked if this was to stop Santa getting the virus? She then asked who would deliver all the presents if he had to self isolate. I must admit that I thought this was a very good question, especially as she’s starting to slowly question his existence. I said it was likely ok as Santa had just got his booster as he is over 50.
I remember when the third week of December was one long string of Xmas client lunches that you desperately tried the leave as early as you could politely do so even if that was 8pm. This week they’ll be no time for lunches and we’ll be glued to our screens with just the eight G20 central banks deciding on monetary policy. The Fed’s decision on Wednesday will be key of course, with anticipation that they might accelerate the tapering of their asset purchases, but there’s also the ECB and Bank of England meetings to watch out for as well. All of them are very much “live” meetings. Elsewhere the flash PMIs for December (Thursday) could give us an initial indication as to how increased restrictions have begun to affect economic activity. US retail sales and UK CPI (both Wednesday) might be other interesting data points.
Reviewing the main highlights in more details now. The Fed’s decision on Wednesday will be the focal point of the week. In terms of what to expect, our US economists write in their preview (link here) that they anticipate a doubling in the pace of tapering, which would bring the monthly drawdown of Treasury and MBS to $20bn and $10bn per month respectively. That would see the process of tapering conclude in March, giving them greater optionality for an earlier liftoff. Bear in mind that this meeting will also see the release of the latest dot plot, as well as the projections for inflation, growth and unemployment. On that, our economists see the median dot in 2022 likely showing two rate hikes, with risks of more, up from September when only half the dots saw any hikes by the end of 2022.
The ECB’s decision will then follow on Thursday. In our European economists’ preview (link here) they write that until the arrival of the Omicron variant, the ECB appeared on track to initiate a transition to a monetary policy stance based more on policy rates and rates guidance and less on liquidity provision. They were also set to create a policy framework with more optionality to better respond to inflation uncertainties. The Omicron variant reinforces the need for optionality, but until there’s greater clarity on what it means for the pandemic and the recovery, the ECB may stall the expected decisions in part or in whole until early 2022. As with the Fed, it’ll be interesting to see the December staff forecasts on inflation, which could influence the market view on lift-off timing.
The Bank of England’s decision will then take place on Thursday, and our UK economist expects the MPC will raise Bank Rate by +15bps to 0.25%. In the preview (link here) it argues that news of the Omicron variant has changed little on the medium-term economic outlook, with the labour market remaining as tight as it has been in recent memory, and inflation continuing to outpace staff forecasts. Nevertheless, the risks to this view are finely balanced, and risk management considerations may lead them to delay a rate hike, as they instead opt to find out more information on Omicron’s impact.
Finally on the central bank front, the Bank of Japan will be holding their final monetary policy meeting of the year on Friday. In our economist’s preview (link here), it says that although there had been an expectation that the bank would revise their special pandemic corporate financing support program at this meeting, the emergence of the Omicron variant has changed the situation. Given the next meeting is only a month later, the view is now that they’ll maintain a wait-and-see stance in this meeting and adjust the policy in January, although a revision remains possible this week if more positive evidence is found on the new variant.
Moving on to the data, the main highlight will be the flash PMIs for December from around the world on Thursday which will offer an initial indication as to whether there’s been any economic reaction yet to rise in restrictions and the emergence of the Omicron variant. There’ll also be an increasing amount of hard data out of the US for November, including retail sales (Wednesday), industrial production, housing starts and building permits (all Thursday). In China, Wednesday will see the release of their own retail sales and industrial production data for November, and in Germany on Friday there’s the Ifo’s business climate indicator for December. Finally on the inflation side, releases will include the US PPI data for November tomorrow, along with the UK and Canadian CPI readings for November on Wednesday.
Late on Friday the UK released a paper looking at vaccine effectiveness against the Omicron variant. The good news is it suggested those who’d been boosted at least a couple of weeks ago still had decent protection, with 3 doses of Pfizer offering 75.5% effectiveness against symptomatic disease, and those who’d had two doses of AstraZeneca followed by a Pfizer booster had 71.4% effectiveness. Those are both lower than the 90+% effectiveness against delta with a booster, but is still much better than some of the worst outcomes had feared. Furthermore, if the past variants are anything to go by, then the protection against severe disease and hospitalisation could be even higher. However, the bad news is it indicated those who’ve been double-jabbed for some months now have significantly waning protection against this new variant from a purely symptomatic basis without a booster, so this will only encourage governments to ramp up their booster campaigns. The UK last night accelerated their plans to get all over 18s offered a booster. It’s now by the end of the year which will be a Herculean task. This follows PM Johnson last night telling the nation that there’s a tidal wave of Omicron cases coming. The government expects it to become the dominant strain very soon in what will be an incredibly short space of time.
Overnight in Asia, markets are trading notably higher with the CSI (+1.31%), Hang Seng (+1.01%), Shanghai Composite (+1.00%), the Nikkei (+0.89%) and KOSPI (+0.28%) all strong after China's policymakers' hinted at more stimulus at the end of annual Central Economic Work Conference on Friday. Indeed our economists suggest that this is the decisive policy shift that markets have been waiting for and believe it’s a big deal. See their report on it here. This optimism is being reflected in the near 6% jump in Iron Ore trading overnight. DM futures are indicating a positive start to markets in the US and Europe with S&P 500 (+0.37%) and DAX (+0.44%) futures both in the green.
Looking back at last week now and the focus remained squarely on Omicron, where the lack of any concrete bad news lent a more optimistic tone.
This modestly improved risk sentiment sent equities and yields higher, and pushed volatility lower with the VIX ending the week -11.88 ppts lower at 18.79. The S&P 500 and Stoxx 600 gained +3.82% and +2.76% over the week (+0.95% and -0.30% Friday respectively). Cyclical sectors and tech stocks led the gains in the US. The small cap Russell 2000 advanced +2.43% (-0.38% Friday) while the Nasdaq climbed +3.61% (+0.73% Friday). The optimism also pushed yields higher and yield curves slightly steeper, with the 10yr treasury gaining +14.1bps this week after a poor close the previous week (-1.5bps Friday) and 10yr bunds climbing +5.1bps (+0.7bps Friday). The 2s10s treasury curve steepened +7.2bps (+1.6bps Friday). Ahead of the Fed’s meeting this week, the market is pricing the first full Fed rate hike by June.
In the world of central banking, the Bank of Canada kept policy on hold and reinforced expectations for their inflation target to be sustainably achieved in the middle of 2022, enabling policy rate hikes. Like most DM central banks, they are focused on persistently elevated inflation, which they ascribe to supply constraints that will take time to alleviate. The Reserve Bank of Australia also left its benchmark interest rate unchanged while cautioning that price pressures remain subdued, in contrast to the rest of the DM space.
In China, the PBoC cut the required reserve ratio by -50bps to support the economy, while FX reserve ratio was lifted +2.0% to lean against an appreciating renminbi. Property developers Evergrande and Kaisa defaulted on dollar debt. Chinese officials asserted the defaults would be dealt with “in a market-oriented way”.
Geopolitical rumblings out of Europe also garnered focus. Presidents Biden and Putin held a phone call to discuss tensions following the build-up of Russian forces on the Ukrainian border. The readouts following the call offered few details but signalled both sides would follow up. President Biden has cautioned severe economic sanctions would be levied should Russia invade Ukraine, including sanctions on Putin’s inner circle, energy companies, and banks. The US would also consider severing Russian access to the US-run international payments system, SWIFT.
On Friday, US CPI increased 0.8% and core US CPI increased 0.5% month-over-month in November, with the headline reading a tenth ahead of expectations. Commensurate year-over-year readings were 6.8% and 4.9%, the highest readings since 1982 and 1991, respectively. Measures of underlying and trend inflation continued to move higher, suggesting the Fed’s recent hawkish pivot will continue to be embraced by policymakers.