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Market Update
Risk appetite is broadly starting the week on a firmer footing, with equities in Europe shrugging off a mixed but mostly negative Asia Pacific session lead and in the green across the board. Asia sentiment was hurt amid further downside in Evergrande shares as the co. warned that it might not be able to service all upcoming debt payments, though the PBoC did also surprise markets with a 50bps reserve requirement ratio cut which will release a touted CNY 1.2T in liquidity from the Chinese banking system. The Stoxx 600 is up about 0.75% on the day, though trading around the 466 mark means it is only trading around the mid-point of last week’s range and still some 5.0% below recent highs. This is helping US equities in pre-market trade, with S&P 500 futures higher by about 0.5%, Dow futures up about 0.7%, though Nasdaq 100 index futures are down about 0.2%. Evidence is building in South Africa that the Omicron variant is significantly milder than prior Covid-19 variants and this is easing some concerns amongst market participants that its spread will cause significant further disruption to the global economy.
The Nasdaq 100’s underperformance can be explained by pre-market upside in US bond yields; 2s are up 4bps to above 0.63%, 10s are up 6bps to close to 1.40% and 30s are up 5bps to back above 1.70%. Yields in the US and elsewhere are higher as a result of a lessened demand for safe haven assets amid increased bets that the global recovery will prove more resilient to Omicron than recently feared. But the US 10-year yields failure to reclaim 1.40%, which had acted as support as recently as last week before tumbling below on Friday, is telling those markets remain tentative. The fact that 10-year yields still remain about 30bps below recent pre-Omicron emergence highs suggests a large amount of pessimism about the long-term economic outlook remains priced in.
Compare that to two-year yields, which came within a whisker of matching pre-Omicron highs just under 0.66% as recently as Friday. The significant flattening of the US yields curve that has seen the 2s10s spread plummet from over 100bps in mid-November to around 75bps, the lowest point since Q4 2020, is a reflection of expectations that an increasingly inflation-concerned Fed is going to press ahead with monetary tightening even in the face of economic uncertainty and that this is set to weigh on the longer-term economic outlook. Looking at other asset classes this morning, FX market performance is largely reflective of risk on, with risk sensitive AUD doing the best ahead of Tuesday’s RBA decision and CAD also doing pretty well as oil prices recover ahead of Wednesday’s BoC meeting. By contrast, safe-haven JPY and CHF are underperformers. The DXY is broadly flat in the 96.20 area, with EURUSD a little lower just under 1.1300, GBPUSD a little former above 1.3250 and USDJPY firmer and above the 113.00 level. Crude oil is higher, with WTI above $68.00 again, amid risk on flows and news of the Saudi Arabians increasingly the official selling price to their Asian customers. Gold is a little softer under $1780 amid higher yields.
Day Ahead
There are no notable events on the data docket this Monday, with focus instead of key risk events coming up later in the week, like Tuesday’s RBA meeting, Wednesday’s BoC meeting and Friday’s US inflation numbers for November.
