Markets soothed as debt ceiling fears, gas prices ease

Risk appetite took a turn for the better following the close to European trade yesterday and has continued to improve overnight and into this morning’s European session. US equities closed out yesterday’s session in the green (S&P 500 index +0.4%) above the 4360, putting the most widely followed US equity bourse back in the green on the week. E-mini S&P 500 futures have subsequently gained a further 1.2% in pre-market trade, mirroring the positivity seen in Asian and European equity bourses (the Hang Seng closed up by more than 3.0% and the Stoxx 600 is currently higher by 1.2%). Positive new developments on a number of key market themes at the moment have driven the improvement in sentiment; firstly, debt ceiling concerns in the US have eased after the Senate Republican Leader Mitch McConnell indicated he would be willing to negotiate a stand-alone stopgap bill that would suspend the debt ceiling into December to guarantee an accidental default is avoided. Short-term US yields (i.e. on the debt maturing in the weeks after the 18th of December, the date by which Treasury Secretary Yellen had warned the US would start defaulting on its liabilities if the debt ceiling wasn’t lifted) fell in response to the news, suggesting markets have meaningfully revised lower their probabilistic expectations for an accidental default later in the month. If negotiations on such a bill show progress in the coming days, this could continue to support US market sentiment.

Secondly, after a highly volatile open to trade in European gas markets which at one point saw UK gas prices spiking as much as 40%, natural gas prices eventually eased to close to the session about 7% lower after verbal intervention Russian President Putin (some analysts have jokingly called Putin the governor of the European Central Bank of Gas). Putin said that Russia would export more gas to Europe given the “disbalance” in markets there. Nat gas prices continue to drop this morning but remain at historically elevated levels. The jury is still out with regards to whether yesterday’s spike was the top for the gas market, with it all depending on whether Russia lives up to Putin’s promises and on how weather conditions are this winter (colder conditions equal a higher demand for gas). The pullback in gas prices has triggered a broader decline in energy markets with coal and oil falling in tandem; WTI this morning trades around $76.00 per barrel, a roughly $3.50 reversal from yesterday’s highs, but found decent support having been found at $75.00. The decline in energy prices has enabled a pullback in inflation expectations and has facilitated recovery in bond prices from recent lows; US 10-year yields went as high as 1.57% yesterday but have since fallen back to around 1.52%, while German 10-year yields were as high as about -0.15% at one point on Wednesday but have fallen back to around -0.20% this morning.

Elsewhere, a few other factors are being cited as boosting sentiment this morning including; 1) reports suggesting there could be a US President Biden/China President Xi summit before the end of the year (signs the two sides are engaged in high-level talks is positive in the face of heightened geopolitical tensions with China regarding Taiwan) and 2) reports from Bloomberg that the ECB is studying a new bond-buying tool to help prevent a taper tantrum when the PEPP expires in March 2022 (though for most analysts, it is a bit of a no brainer than the ECB would implement some sort of PEPP replacement so as not to taper net QE purchases so aggressively). Given the recent reports, there will be heightened attention on today’s ECB minutes, with analysts looking for any indications as to what the post-PEPP ECB programme might look like, and upcoming ECB speak.

Elsewhere in notable market news, Wednesday’s US ADP national employment estimate showed 537K jobs being added to the US economy in September, more than 100K above market consensus. Analysts point out that ADP’s estimate has become more accurate in recent months (though this may just be luck) following a prolonged period in the immediate pandemic aftermath where it would (most of the time) not come anywhere close to the official NFP figure. In the last three months, ADP’s estimate has been within 100K of the official jobs number. Thus, yesterday’s ADP data bodes well for a decent NFP number (markets continue to expect somewhere between 400K-500K jobs having been added to the economy in September). But the markets nonetheless ignored the data, which strengthens the argument that market participants are deeming this Friday’s official jobs report as less important than in recent months given widespread agreement that the Fed’s taper timeline (announcement in November, start in December, conclude in mid-2022) is on “auto-pilot”. In other words, it would have to take a huge miss on expectations (i.e. a large negative number) for the Fed to decide to delay its QE tapering plans, which markets view as very unlikely, especially in light of the latest ADP numbers.

Taking a look at how FX markets are responding to recent developments this morning; we are seeing some outperformance in the risk-sensitive antipodes (as equities recover), with AUD up about 0.5% on the session versus the dollar and NZD up about 0.4%. AUDUSD has thus been able to reconquer the 0.7300 level, with the news that New South Wales remains on track for an easing of Covid-19 restrictions on the 11th of October, as per the State’s premier, probably providing some impetus. GBP, CHF, EUR, CAD and JPY are all up against the dollar by between 0.1-0.2% in fitting with a broadly subdued tone to broader FX markets and the US dollar is the modest underperformer amid the better tone to sentiment. The Dollar Index has dropped back about 0.15%, having failed to test September highs at the 94.50 mark yesterday, but still remains above the 94.00 mark where it may well remain supported ahead of tomorrow’s official US jobs report. Elsewhere in FX market-relevant news, we have had some central banks speak from the ECB and BoE this morning; the BoE’s new Chief Economist Pill sounded hawkish, saying that the balance of risks is currently pointing more towards a more worrying inflation outlook and high inflation looks to prove more persistent than previously anticipated. By contrast, ECB’s Stournaras pushed back on money market pricing for an ECB rate hike in 2023 and reiterated that inflation is expected to fall back under 2.0% in the short-term, a view also backed up by ECB members Elderson and Villeroy.

Looking ahead to the rest of the session; first up, market focus will be on the latest US weekly jobless claims numbers out at 1330BST, after a string of weeks where initial claims have surprisingly risen. Media expectations are for a fall back under 350K. FOMC member and NY Fed President John Williams is then on the wires at 1340BST, followed by ECB President Lagarde and ECB’s Schnabel at 1400BST. The Loonie traders will be looking at Canadian Ivey PMI data out at 1500BST and then attention will turn to more G10 central bank speak at 1645BST for comments from ECB Chief Economist Lane and at 1700BST for comments from BoC Governor Macklem.