Volatility remains high

Market movers today

Today, we will get the final September manufacturing PMIs. Indices are broadly expected to stay below the 50 level, reflecting a slowdown in global manufacturing activity. Later in the week, Wednesday, we will get the service PMIs. Pent-up demand has been driving service-led growth particularly in the European economy this year but recently the momentum has been fading.

In the central bank calendar this week, the Reserve Bank of Australia will meet tomorrow and the Reserve Bank of New Zealand will follow on Wednesday. Thursday brings ECB minutes where we will get a bit more background on why the ECB decided to hike by 75bp and what their expectations are for further hikes ahead.

Otherwise, markets will continue to keep a close eye on the quickly-evolving European security landscape and on EU leaders as they push for an eighth batch of sanctions against Russia. Most world leaders, including some of Russia's traditional allies such as Serbia, have condemned Russia's illegal annexation of the four oblasts in Eastern Ukraine on Friday. Yet, India and China abstained the resolution vote in the UN. While a frozen conflict in Ukraine is well priced in, the risk of a severe escalation and NATO involvement remains and could have substantial market implications.

The 60 second overview

The volatility in the global financial markets continue given hawkish comments from the global central banks combined with the uncertainty regarding the terminal monetary policy rates as well as the rising risk of a recession, especially in Europe. 

In Brazil there will be a second round of the presidential election as the opposition candidate Lula did not get more than 50% in the first round. The second round will be between the current president Boloanaro and Lula.

The negative sentiment continues to dominate the Asian equity markets this morning and the yield on 10Y US Treasuries decline in Asian trade.

The problems for the UK bond and equity markets are expected to continue this week despite the BoE's attempt to stabilise the market last week. Firstly, on Friday S&P placed UK government bonds on negative outlook on the back of the fiscal plan proposed by the UK government. S&P warned about the negative risk of a fiscal expansion based on borrowing through the Gilt market. Secondly, more and more conservatives including MPs are against the new fiscal plan and expected to vote against the plan in the parliament. German government bonds, on the other hand, remain very expensive despite the new EUR 200bn energy package from the German government. The package is expected to be funded through the Economic Stabilisation Fund, that was set up during the pandemic, and thus not having impact on the issuance of bonds and bills. Hence, we saw the Bund ASW-spread move above 100bp despite the significant fiscal expansion through the energy package.

Equities: The rebound in European markets was short-lived on Friday, as US slid lower over the course of the session. Uncertainty (VIX above 30) and rapid moves on FX- and bond markets continue to put pressure on equities. If any of the two is improving, we can easily see an equity rally (albeit an unsustainable, in our view). No clear direction between sectors, with cyclicals- and defensives selling off equally on Friday, but value beating somewhat. Retail led the declines, as Nike plunged on weak earnings and sky-rocketing inventory levels. Remember that the inventory situation is recessionary, but also disinflationary. Hence, we expect the value outperformance last week to be short lived. S&P and Nasdaq closed down -1.5%, Dow -1.7% and Russell 2000 0.6% and futures are mixed this morning.

FI: European bond yields declined on Friday given the rising risk of a recession. Furthermore, the German ASW-spreads continue to richen despite the massive energy package that the German government put forward last week. However, it is expected to be funded through a special fund, namely the Economic Stability Fund rather than the issuance of Bunds. This is contrary to UK where the funding of their fiscal support package takes place through Gilts. This led to a negative rating action from S&P on Friday, as they put UK on negative outlook.

FX: EUR/USD has staged a bit of a comeback over recent sessions. However, this is not entirely unusual as spot often rise amid global risk aversion. NOK FX has been trading heavily on the back-foot in recent sessions with EUR/NOK having moved to the high 10.60s. Over the last weeks there has been no support from relative central bank communication, the global investment environment, GBP correlations, commodities incl. oil prices and fiscal FX transactions with Norges Bank.

Credit:  Euro credit spreads were slightly tighter on Friday, with iTraxx Main in by 4bp to 135bp and Crossover by 21bp to 641bp. However, both indices ended the week 4bp wider.

Nordic macro

There is an obvious risk that Swedish manufacturing PMI will drop below the 50 level in the September reading, joining other European countries around the 48 level. In particular, new orders appear set to deteriorate further from the 47.4 August print.

The Riksbank's Martin Flodén will speak at 12.00 CET on the topic "The Riksbank on the situation in the Swedish economy - Where are we going?". With the September minutes published, he can elaborate more about his personal views. In the Minutes, Flodén highlighted the uncertainty and said he could see scenarios for both another large hike in November as well as an unchanged policy rate.