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Market Update
After a strong US session on Monday that saw the S&P 500 close more than 1.0% higher just under 4600, markets have seen a further extension of risk on flows during the Asia Pacific and European sessions. The Stoxx 600 is up a healthy 1.8% and trading at one-week highs close to 480, while S&P 500 futures are up a further 1.2% in pre-market trade in the 4650 area. In Asia, the Hang Seng gained 2.7% and Nikkei 225 1.7%. Other risk assets are being dragged higher in tandem, with WTI up about 2.5% to above $71.00 and with risk sensitive currencies like AUD, NZD and CAD outperforming in the G10 space. Havens are unsurprisingly the laggards; whilst US and European bonds have stabilised after a big rise in yields on Monday, the likes of the yen, euro and Swiss franc continue to suffer.
As to why markets remain in risk on mode; traders continue to cite receding fears about how badly the emergence of the Omicron variant is going to affect the global economy. Recent days have seen further evidence emerge to support the hypothesis that the symptoms associated with Omicron infection are milder than prior variants like delta. Vishnu Varathan, head of economics and strategy at Mizuho Bank, said that “while epidemiologists have rightly warned against premature conclusions on Omicron, markets arguably surmised that last week’s brutal sell-off ought to have been milder… (given that) early assessments of Omicron cases have been declared mild”.
Analysts at ING were more cautious; “good news relating to the severity of Omicron should be taken with a pinch of salt” the bank said, adding that “faster transmission could offset the benefits of milder symptoms”. “More broadly,” they continue, “it is still early days, even if markets are starting to display Omicron fatigue”. Elsewhere, signs that Chinese policymakers are stepping up the plate to support faltering growth in the country is also being touted as supportive of risk appetite on Tuesday.
After its 50bps reserve ration requirement cut on Monday, which is expected to release CNY 1.2T in liquidity from the Chinese banking system, the PBoC cut rates on its relending facility by 25bps with the aim of supporting the rural sector and small firms. Meanwhile, the powerful Chinese politburo pledged on Tuesday to keep economic operations within a reasonable range in 2022, whilst also promoting healthy developments in the property sector. Expectations of stronger Chinese growth in the months ahead as a result of these measures helped boost global commodity markets (copper is up 0.9% as a proxy of this) and has helped contribute to the risk on feeling on Tuesday.
Looking a little more closely at crude oil markets; are rebounding strongly for a second consecutive day, with WTI this morning probing $72.00 having started the week just above $66.00. General risk on vibes is helping, though a few crude specific themes are also helping; 1) the Saudis rose their Official Selling Price for Asia customers over the weekend which is taken as an indicator of healthy demand and 2) talks between Western powers and Iran over a return to the 2015 Nuclear pact (that could see millions of barrels in Iranian oil exports return to the global market) have not been going well, though will restart later in the week.
Now turning to a closer look at FX markets; AUD is the outperformer as a result of risk on, strong China trade data and in wake of last night’s RBA rate decision. The decision held few policy surprises; the bank held rates at 0.1% as expected and reiterated the pledge to continue buying bonds at a pace of AUD 4B per week until February. But the bank said that it didn’t see Omicron as something that would derail the Australian recovery. Famous RBA watcher Terry McCrann said on Tuesday that “after the latest RBA board meeting it is clear Australia is moving closer to a rate rise, not just potentially in 2023 but possibly even relatively early next year” and others seem to have interpreted the latest announcement as opening the door to earlier tightening. AUDUSD this morning crossed above 0.7100. In terms of the rest of the G10, the format is largely reflective of risk on with CAD and NZD also doing well, while JPY, the euro and CHF struggle a little. The DXY is broadly flat on the day in the day, with trader focus very much on Friday’s US CPI numbers.
Day Ahead
Today’s economic slate is fairly thin. US and Canadian October trade figures are released at 1330GMT alongside US Q3 Nonfarm productivity and unit labour costs numbers. This data shouldn’t shift markets much. Later in the session, Loonie traders will also be watching the release of November Ivey PMI data at 1500GMT. Aside from that, the only other notable economic event will be the release of private weekly oil inventories at 2130GMT.
