In a Volatile Mood – Forex Action
The movers on the market today
With a light data schedule today, markets will remain in a wait-and-see mode ahead of tomorrow’s FOMC meeting and will monitor developments between Russia and Ukraine.
After the surprise German PMIs on the upside yesterday, it will be interesting to see if the German IFO index also signals a rebound in growth momentum in January.
In the United States, consumer confidence for January is expected, which could be further affected by the impact of Omicron.
In Sweden, inflation expectations will be at the center of concerns.
The overview in 60 seconds
Global Growth: Eurozone business activity continued to slow in early 2022 according to PMIs, albeit with diverging trends across sectors and regions. The German economy, in particular, rebounded as services activity remained surprisingly resilient in light of Omicron’s headwinds and manufacturing momentum picked up as supply bottlenecks continued to shrink. Services activity in the United States also slowed markedly in January, while strong price pressures remain a concern in both regions.
Markets: Risk sentiment deteriorated on Monday and the VIX volatility gauge hit its highest level since early December. Oil prices retreated to USD 86/bbl and German Bund yields fell back below -0.1%, after touching positive territory last week. The Fed’s upcoming tightening (FOMC tomorrow) and rising geopolitical tensions in the Russia-Ukraine dispute (the US alerting 8,500 NATO troops for deployment) have contributed to the aversion at risk.
Shares: While a cocktail of macro valuation and earnings fear corrected European markets by -5% (the worst one-day performance since March 2020), US markets rebounded significantly. The S&P 500 clawed back a -4% correction in trading hours, to close 0.3% higher. Investors bought lower growth, but most sectors were riskier. Consumer discretionary and industrials led the market and defensives lagged. Small caps outperformed massively, with Russell 2000 up 2.3% against Dow 0.3% and Nasdaq 0.6%. However, the rebound is not trickling down to Asia, with markets down 1-2% and US futures back in the red this morning (led by technology).
FI: Yesterday’s European session was a traditional flight to safety with underperforming risk assets and performing safe haven assets. Until late in the US trading session, falling yields seemed to be the fatality of the day, but a sharp reversal, with 10-year US Treasuries up 5 basis points, left the point at 10 years virtually unchanged on the day.
Effects : EUR/CHF fell yesterday and EUR/Scandies rose as risk aversion increased.
Credit: Credit markets – and the high beta segment in particular – came under significant pressure yesterday. Itraxx Xover widened 12bp to 282bp and Main widened 2.7bp to 58bp. HY bonds closed down 10bps while IG bonds held up better and ended flat for the day.
The only item on the Swedish agenda today is Prospera’s monthly inflation expectations survey (smaller money market players only). On all horizons (1y, 2y and 5y), expectations are back at 2%, but still have to jump significantly above the 2% anchor. We don’t expect that to be the case this time around either, although it’s possible that the shorter ones in particular will continue to climb somewhat, while 5-year expectations are likely to remain at 2. % or close to 2% until there are signs. more generalized inflationary pressures in the Swedish data.