Global markets remain at the mercy of risk sentiment

Markets

A (modest) rise in yields combined with a faltering equity sentiment, recently flagged markets’ unease with inevitable choices central banks won’t be able to delay much longer. Until now, the Fed and ECB preferred to err on the side of easy financing conditions rather than risking a premature tightening. With inflation rising and at risk of staying higher for longer, this preoccupation is put in doubt. Delay of action is becoming a source of uncertainty. This conundrum yesterday unraveled into an outright risk-off mood. Other storylines (Evergrande/Chinese financial stability, uncertainty on the US budget/debt ceiling, rising gas and energy bills …) further convinced investors to take some chips off the table. US and European indices lost first support levels, turning the buy-on-dips bias into a ST stop-loss dynamic. Europe declined about 2%. US indices ceded between 1.7% (S&P) and 2.19% (Nasdaq), but closed off intraday lows after a late session rebound. Contrary to last week, the risk sell-off restored the usual safe haven run to core bonds. The decline in yields was mainly driven by inflation expectations (in line with the setback in commodities) rather than real yields. The US and German curves bull flattened with yields at longer maturities tumbling up to 5 bps. The Japanese yen (close USD/JPY at 109.44 from 109.95) and the Swiss franc (EUR/CHF close 1.0879 from 1.0930) regained their safe haven posture. The dollar first outperformed the euro, but EUR/USD avoided a break below 1.17. Closing at 1.1728, the damage was limited after all. Smaller and commodity-related currencies were hit hard. Sterling was no exception with EUR/GBP closing at 0.8585 (from 0.854). In Central Europe, the forint and the zloty faced strong headwinds. EUR/PLN cleared the key 4.60 reference.

Tension on Asian markets are easing this morning as markets ponder the potential (systemic?) risk of an Evergrande default. US yields gain, albeit marginally. The dollar trades on the backfoot (DXY 93.17; EUR/USD 1.1735). The Swedish Riksbank and the National Bank of Hungary (MNB) will today kick-off a long series of central bank meetings. Especially the decision of the MNB (30 or 15 bps rate hike?) will be important for the local market. Global markets remain at the mercy of risk sentiment. Uncertainty might persist at least until Wednesday’s Fed policy decision, with a ST sell-on up-ticks logic searching for next support (S&P 4235 area, EuroStoxx50 3900 area). The risk-off pushed US and German yields off recent highs, but no important support has been broken. We look out when/to what extent the tapering narrative will again interfere with risk-off. The 1.26% area in the US 10-y yield and -0.36% in the German 10-y serve as first reference on the charts. The dollar’s risk-off performance in the end was rather disappointing. The jury is still out, but the EUR/USD 1.1664 support might not be that easy to break.

News headlines

The leader of Canada’s main opposition Conservative Party, O’Toole, conceded defeat in the snap parliamentary election. Liberal party leader and prime minister Trudeau that way secures a third term in office. Trudeau didn’t get his hoped-for parliamentary majority. The projected count puts the Liberals at 157 seats in the 338-headed parliament, compared to 121 seats for the Conservatives. Trudeau will normally extend his minority government which has become quite common in Canada. The left-leaning New Democratic Party is the government’s most important partner and grants sufficient support to pass Trudeau’s (social) spending plans and economic agenda. The Canadian dollar slightly outperforms this morning, both against the dollar and the euro. USD/CAD returns below 1.28 after the past days’ volatility/risk related spike higher. A general easing in risk sentiment might be at play as well.

Reserve Bank of New Zealand assistant governor Hawkesby in a speech said that when risks are evenly balanced, central bank globally tend to follow a smoothed path and keep policy rates unchanged or move in 25 bps increments. Markets started discounting a more bold start to tightening cycle after a sudden Covid-outbreak on the eve of the August 18 RBNZ policy meeting, prompted the RBNZ to postpone the pre-announced start of the normalization cycle. The RBNZ meets on October 6 and will all else equal start hiking rates to fend off inflationary pressures (3.3% Q/Q in Q2). The kiwi dollar initially spiked lower, but made an intraday U-turn in line with this morning’s risk sentiment.

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