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Market Update
Trading conditions are highly subdued ahead of the open of Wednesday US trade. After the S&P 500 posted an impressive 1.8% gain on Tuesday that saw the index move into positive territory on the week (though still about 2.0% below recent record highs), S&P 500 index futures are this morning trading flat in the 4650 area, with Nasdaq 100 and Dow futures also flat. European equities, meanwhile, are mixed but also mostly subdued, with the Stoxx 600 index also now trading in the green on the week just under 475. The dip buying that helped global equity markets erase steep losses on Monday comes despite nations Europe reimposing varying degrees of restrictions in an attempt to curb transmission. For example, Germany just placed limits on private gatherings to up to ten people (whilst the unvaccinated are under lockdown).
According to advisory Ord Minnett, “clients are still happy to buy here despite the obvious risks both market- and health-related, mostly they are adding to their existing positions”. “After two years clients are weary of talking about it (COVID-19) and while acknowledging it are back to focusing on earnings which should be really good in our view” the advisory continued. Meanwhile, one analyst at Invesco make the point that “it looks like each successive lockdown has been less severe in terms of economic impact than the previous ones… I think that’s partly because there’s been a lot of adaptation in the economy”. “Maybe the restrictions won’t be as severe, as comprehensive or as long-lasting as in 2020 and 2021” the Invesco analyst added. Over the next few sessions, whilst keeping an eye on Omicron related newsflow will be important, investors suspect that typical holiday trading conditions will take hold. That means low volumes and low conviction in terms of price action, meaning rangebound trading conditions are likely in equities and in other asset classes.
Bond markets are certainly in holiday mode. The US yield curve is as flat as a pancake this morning (in terms of on the day changes), with the 2s flat just under 0.68% and the 10s flat just under 1.48%. Yields in Germany are similarly flat, though there has been some focus not a rise in Italian (and other periphery Eurozone yields) on Wednesday amid hawkish commentary from more ECB members. Notably, Slovakian Central Bank head and ECB governing council member joined a throng of other ECB policymakers in warning about the risks of elevated inflationary pressures. This has largely failed to give the euro any notable lift, with EURUSD trading only a tad higher on the session close to the 1.1300 level. Indeed, as with other markets on Wednesday, FX markets are also in holiday mode. According to analysts at ING, the couple of weeks either side of Christmas day usually see low volatility for currencies, though they caution that “this year some seasonal tendencies will be mixed with the Omicron variant threatening to force new restrictions and markets still processing a week full of key central bank decisions”.
Looking at the rest of FX markets on Wednesday; GBP and NOK are the G10 outperformers, despite mixed UK GDP data released this morning and the fact that oil prices are today flat, though WTI crude is substantially off earlier weekly lows in the $66.00 area trading above $71.00. The UK economy grew at a 1.1% QoQ pace in Q3, data this morning showed, slower than the expected pace of 1.3%, though the YoY rate of growth was better than expected at 6.8% (forecasts were for 6.6%). GBPUSD is about 0.3% higher on the session and trading comfortably to the north of the 1.3300 level, though still remains some way below last week’s 1.3370 post-surprise BoE rate hike highs. According to analysts at MUFG, “we continue to believe that the UK rate market appears well priced at the current juncture for up to four BoE hikes next year… It provides a high hurdle for the pound to strengthen on the back of a hawkish repricing of BoE expectations in the near-term, especially as the worst of the new Omicron COVID wave is yet to be seen”. NZD and AUD are also fairing fairly well, up 0.25% on the day versus the buck each, lifting AUDUSD to the 0.7170s and NZDUSD to the 0.6780s. CAD, CHF and JPY are all broadly flat on the session.
Day Ahead
In terms of the day ahead, the final estimate of US Q3 GDP will be released at 1330GMT but ought not create too much excitement. Indeed, it’s been nearly two months since the first estimate was released, so markets have had plenty of time to digest what happened in Q3. Focus is very much on how the US economy faired in Q4 and is set to fair in Q1 2022 as Omicron cases surge in the US. CHF traders will be watching the release of the SNB’s Quarterly Bulletin at 1400GMT, and US Existing Home Sales data is scheduled for release at 1500GMT. Aside from that there is the usual weekly US crude oil inventory report at 1530GMT which crude oil traders will be keeping an eye on after last night’s bullish Private API numbers.
