Tensions mount as the US seeks to end war in Ukraine

In focus this week

Today in Germany, we receive the Ifo indicator for November. The PMI released on Friday surprised on the downside, although this mainly seems like an "adjustment" from very high numbers in the past months. Even after the decline the composite PMI is still at the highest level in one and a half years when excluding the October reading.

On Wednesday, we will keep an eye on the UK as Chancellor Reeves presents the Autumn budget. Gilts and GBP will be sensitive to how an inevitable fiscal tightening looks and whether the fiscal gap is plugged sufficiently. Markets soured on the UK when Reeves recently scrapped plans to hike the income tax rate.

On Thursday, we look for euro area credit growth data and Danish retail sales for October. Regarding retail sales, our Spending Monitor showed a 0.6% m/m decline in real retail spending in October, and we expect spending growth to remain muted.

Rounding off the week, we receive the flash estimates of inflation in Germany, France, Italy, and Spain which together will reveal almost entirely how inflation in the euro area fared ahead of the aggregate data next week.

Economic and market news

What happened overnight

In the Ukraine war, US Secretary of State Marco Rubio stated that peace talks in Geneva "showed meaningful progress" but declined to share details. On Sunday, US President Donald Trump urged Ukraine to accept the 28-point plan, blaming Ukraine and Europe for the lack of a truce.

What happened over the weekend

In the euro area, November PMIs were close to expectations with the composite PMI falling marginally to 52.4 from 52.5 in October (cons: 52.5). The manufacturing PMI declined to 49.7 from 50.0 (cons: 50.1) and the services PMI climbed to 53.1 from 53.0 (cons: 52.8). The price indices showed an uptick in input prices and marginal decline in output prices. Inflation remains under control and risk has shifted from inflation being too high to instead being too low. With growth still holding up, we expect the ECB to be on hold at 2.0% in the coming year despite inflation forecasted to fall below the 2% target.

The ECB's indicator of negotiated wages declined by more than expected to 1.9% y/y in Q3 (cons: 2.5 y/y) compared to 4.0% y/y in Q2 and 2.5% y/y in Q1. A faster-than-expected decline in wages is a downside risk to our outlook of unchanged ECB policy rates, as it would lower services inflation which is the main category holding overall inflation up.

In the US, New York Fed President John Williams said that he still saw "room for further adjustment", backing a cut at the next meeting in December. Markets are now pricing about a 60% likelihood of a rate cut in December. Meanwhile, Fed vice chair Philip Jefferson and Boston Fed President Susan Collins did not really comment on the near-term rate outlook and Dallas Fed President Logan reiterated her earlier view that she would find it difficult to cut rates in December.

November flash PMIs landed close to expectations. The manufacturing PMI declined to 51.9 from 52.5 in October and appeared weaker than the headline index suggests. The order-inventory balance turned sharply lower to 46.1 from 49.5 and all else equal, weaker order-inventory predicts weaker output growth as well. Services PMI on the other hand increased to 55.0 from 54.8 in October, with both new orders and price indices turning higher. Overall, the flash print was a mixed bag for the Fed, with some concerning signals surrounding the manufacturing growth momentum.

Equities: Equities stabilized on Friday after several unsuccessful attempts earlier in the week. The S&P 500 finally closed 1% higher, Russell 2000 gained a full 3%, while European Stoxx 600 edged 0.3% lower. Importantly, this was not a rebound led by last week's most-sold names. Instead, markets saw a selective rotation, with investors refraining from buying the dip in the most heavily sold AI names (or in Bitcoin for that matter, down -2% on Friday despite -20% over the last month). Rather, it was small caps and sectors such as materials, healthcare, and consumer discretionary that fared the best. Similarly, we are not seeing the rebound spread to the AI hardware region - Asia - this morning, although European and US futures are higher.

A selective rebound makes sense to us, as last week's selloff was unusual - not in magnitude, but in the fact that the drawdown in equities was not synchronized with other asset classes. While the S&P 500 is 4% off its highs, yields, copper prices, gold, and credit spreads are little changed. We interpret this as a sign that the November selloff is neither macro-driven nor liquidity related. As such, the fundamental read-across to equities outside the AI theme - such as European markets - should be limited.

Is this a buying opportunity then? In a sense, yes. We remain positive on equities on a 3-6 months horizon with a slight equity overweight stance. However, the fact that the equity selloff has not been mirrored in other asset classes also means that positioning support remain absent. Investors have not panicked into bonds - quite the opposite, according to November's fund manager survey, which showed extremely low cash levels. Our correction monitor, which tracks indicators such as the VIX, CTA hedge fund beta, or bull-bear spreads, is far from oversold conditions. As such, we are refraining from increasing the equity overweight further for now.

FI and FX: Dovish comments from Fed's dove Williams sent US rates lower - UST10y from 4.15% to 4.05% - and raised the probability of a December cut to 16bp from a 7bp low after the FOMC Minutes. It supported risk sentiment and lifted equities to a decent c. +1% close after a rough week. Equity futures are in green this morning, while Japan is closed for holiday. The USD's outperformance pulled EUR/USD toward 1.1500. EUR/SEK and EUR/NOK trade around 11.00 and 11.80, respectively.