Market movers today
As markets await the ECB meeting on Thursday, energy price developments will remain in focus, after Russia has conditioned a resumption of North Stream 1 gas flows to sanctions relief from the West. Markets have calmed down after an initial rise in prices yesterday morning.
German factory orders will give some hints on how industry started into Q3. A further decline in orders during July might well be in store, in line with weakening demand conditions signalled by business surveys.
In the US, ISM Services will probably stay more positive than its Markit/S&P Global counterpart in August. Another upbeat report would support the case for a modest rebound in GDP during Q3 (see also Research US – Fed continues to guide US economy towards a recession, 1 September).
The 60 second overview
Quiet markets overnight: Equities are slightly higher overnight and US bond yields up 2-3bp after US markets were closed yesterday for Labour Day. EUR/USD is up a bit trading at 0.995.
Oil market faces headwinds again: Yesterday, OPEC+ announced it cuts production by 100kb/d and EU voiced concerns over the near-term prospect of a revival of the Iran nuclear deal. The market reaction was relatively muted with Brent oil rising by USD 1,5 per barrel and overnight it has fallen back to USD 95 per barrel, the same level as yesterday morning. It likely reflects that the OPEC+ cut is miniscule and the Iran nuclear deal is not off the table. We expect Brent to average USD100-105/bbl for the rest of the year.
New UK prime minister: Yesterday, Liz Truss was elected new Prime Minister of the UK as head of the Conservative Party. On top of her agenda are: the rising cost of living, energy politics (a possible energy bill freeze) as well as further Brexit related discussion on the Northern Ireland Protocol. As the outcome was widely expected, the market reaction was muted and we expect this to continue in the short-term. To avoid massive increases in energy bills to kick in for households, Truss has drafted plans to fix annual electricity and gas bills for a typical UK household at or below the current level of GBP1,971 (USD2,300).
RBA hikes 50bp: The Reserve Bank of Australia hiked rates by 50bp in its meeting this morning in line with our expectations. While there were no new economic forecasts, RBA notes that the outlook for the Australian economy has turned even more negative. Inflation is being driven increasingly by domestic factors, as unemployment rate fell to only 3.4% in July, the lowest level in nearly 50 years. While the statement was largely unchanged from August, RBA now explicitly notes that wage growth is clearly picking up in some sectors, leading to risks of further upward pressure on prices. At the same time, consumer spending remains a key factor of uncertainty, as higher policy rates will feed into higher mortgage rates with a delay. RBA continues to expect further rate hikes, but emphasizes data-dependency when it comes to the exact hiking pace. AUD/USD moved slightly higher after the release due to the bearish economic outlook.
Equities: Equities fell yesterday in Europe with US closed for Labour Day. For MSCI world, this was the seventh day in a row with declines. Energy the only industry in green in the Stoxx600 index. Interesting to see energy continuing to outperform despite the oil price trending lower and the risk of windfall taxes are rising. Automobiles and transportation are the two biggest laggards. Defensives outperformed cyclicals in the sell-off that softened during the day. In Europe yesterday, STOXX 600 -0.8%, FTSE -0.2%, DAX -2.1% and CAC -1.3%. Asian markets are mostly higher this morning on renewed stimulus effort in China. US futures higher as well while European futures are marginally lower.
FI: It was again a volatile day in the European fixed income markets yesterday on the back of soaring gas prices as Gazprom closes for the gas to Europe. This comes after Europe is expected to put a price cap on oil. Hence, at the end of the day yields rose by 4-5bp in the 5Y to 10Y segments. The US Treasury market was closed yesterday, but in Asian trading the 10Y US Treasuries are up 5-6bp in 2Y segment and 3bp in the 10Y segment.
FX: EUR/USD has recovered slightly overnight but remains below parity and is still on a downward trend. Europe’s energy crisis is adding headwinds to the cross currently.
Credit: Credit markets had a difficult Monday following the Russian announcement to halt gas supplies though the key Nord Stream 1 pipeline. The negative sentiment also impacted the level of new issues negatively. Overall iTraxx Main widened by 6bp while Xover was 30bp wider at 586bp.