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Market Update
Risk off is the name of the game on Friday. Stocks in Europe are on the back foot with the Stoxx 600 down 0.4% and set to snap a six-week win streak amid heightened concerns about the economic impact of surging Covid-19 infections and lockdowns. Austria became the first European nation to reimpose a full lockdown on all of its citizens which will last for at least three weeks, with restrictions then to continue on the unvaccinated. Vaccination is set to become compulsory for all Austrians as of February 2022. The situation isn’t just dire in Austria, there has been a lot of focus on Germany as well. German Health Minister Spahn said on Friday that the coronavirus situation had become so grave that a lockdown, including for the vaccinated, cannot be ruled out. According to Ludovic Colin, a senior portfolio manager at Swiss asset manager Vontobel, “a total lockdown for Germany would be extremely bad news for the economic recovery”.
US equities are suffering in premarket trade as a result of the risk off tone being seen in Europe, with E-mini S&P 500 futures down about 0.4% ahead of the open and back below 4700 again, following yesterday’s record close. Safe haven assets are getting a boost and, as a result, bond yields are moving sharply lower in the US and Europe. In Germany, the 10-year yield is 6bps lower to around -0.33%, its lowest since September, and the whole German yield curve fell back into negative territory for the first time since August. In the US, the 10-year is also down 6bps to 1.53%.
Looking at commodity markets; the negative lockdown news in Europe is putting oil prices under severe pressure. But oil markets are also being forced to reckon with news that momentum is building behind an apparently imminent, synchronised release of crude oil reserves in the US, China and perhaps also by other major Asia importers. WTI prices, which stabilised on Thursday and even at one point recovered back to the north of the $79.00 level, have reversed lower and now trades under $76.00, down more than $3.00 (or more than 4.0%) on the day. Gold, meanwhile, continues to trade sideways around the $1860s, as it battles a stronger US dollar and lower crude oil prices (which lower inflation expectations) versus an elevated bid for safe haven assets.
Safe haven currencies are the better performers on the final day of the week, with JPY and USD sitting at the top of the G10 performance table amid the market’s heavy focus on the deteriorating Covid-19 picture in Europe. The DXY has recovered from Thursday lows in just above 95.50 and has in recent trade reclaimed the 96.00 handle, while USDJPY has been nudging lower and is now under 114.00. The euro is somewhat unsurprisingly the underperformer, with EURUSD down 0.6% already today and moving back below 1.1300 in recent trade, having been as high as 1.1370 on Thursday. Bears will be eyeing 16-month lows at 1.1263. Much hotter than expected German Producer Price Inflation data hasn’t offered the euro any respite, while a surprise rise in the French unemployment rate in Q3 to 8.1% from 8.0% in Q2 won’t be helping the euros cause. NZD, AUD, CAD are being dragged lower by falling crude oil prices, with each down around 0.5% on the day, and fellow risk-sensitive currency GBP is also on the back foot in tandem with its cross English channel peer, with GBPUSD also weaker by 0.5%. UK Retail Sales numbers were strong this morning, but this was put down to consumers bringing forward their holiday shopping and sales are expected to moderate into the year end.
Day Ahead
Outgoing hawkish ECB member and German Bundesbank head Weidmann is speaking at 1300GMT and will likely warn about inflation after the hot German PPI numbers. Canadian Retail Sales numbers for October are then out at 1330GMT. Fed Governor Waller is than slated to speak at 1545GMT, followed by Fed Vice Chair Clarida at 1715GMT, followed by another appearance from ECB’s Lagarde at 1800GMT. She already spoke this morning, reiterating the ECB’s now well-known stance that inflationary pressures are set to moderate in the medium-term and the bank should therefore not rush into tightening.
