Weekly Market Updates / 4 months ago

Market update: 10th January 2022

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What is often one of the quieter weeks of the year turned out to be more volatile than anticipated after the US Federal Reserve released a surprisingly hawkish set of minutes from its December meeting. On reading the notes it becomes clear that the Federal Reserve is prepared to move interest rates higher earlier than expected, leading market participants to price the chances of a move upwards before March at over 80%. The minutes also made it clear that the current regime of asset buying (quantitative easing) will be replaced by quantitative tightening sooner rather than later. The combined effect strengthened the dollar, which made back a large chunk of the losses it had suffered in the run-up to Christmas, although sterling and the euro didn’t suffer too much.

Last week also saw the release of the first meaningful data set in 2022 in the shape of the in-depth Non-Farm Payrolls employment report in the US. Although the number came in somewhat lower than the market had anticipated at “only” 199,000 jobs created, it again showed that the problem is not a lack of vacancies but candidates. The unemployment rate is now below 4%, and the scarcity of applicants could lead to further inflation and the start of a wage spiral, underpinning the markets reading of the Federal Reserve’s interest rate intentions. Although not as sharply, inflationary pressures are also being felt in the old continent and the UK. Apart from economic data, the continuing rise of Omicron cases will play in the background. Although, so far, despite it being more contagious, it appears to be milder and not as damaging to the economy as it could be. The week ahead looks to be dominated by US data, including its latest inflation report and worries over political tensions with Russia.

In a blogpost released this morning the IMF warned of turbulence when the US raises rates: “broad-based US wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation. Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally. These developments could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets.”

GBP.

The only significant data release scheduled this week is GDP for the three months to the end of November. The period predates the outbreak of the Omicron variant and consequently may be discounted by the markets. The effects of the variant seem to be mild on both the individual and the economy, so a strong number may encourage more speculation that the Bank of England may tighten after its February 3rd meeting. This should continue to lend a helping hand to sterling, particularly against the euro. Any moves may be capped as there is increasing political risk attached to sterling with Prime Minister Johnson under pressure on several fronts. As always, with sterling Brexit will lurk in the shadows, but recently there has been scant mention of it apart from some sabre rattling by Liz Truss over the weekend. Alongside the GDP data, Industrial and Manufacturing Production are also due for release on Friday.

USD.

As we said earlier the Non-Farm figures were more potent than the headline figure of 199,000 appeared. The dearth of job seekers, possibly leading to a wage spiral, that the data revealed will pile more pressure on the Federal Reserve to act sooner and stronger than they may have otherwise contemplated. The week ahead could see the headline Consumer Price Index break 7% annually for the first time since the 1980s when it is released on Wednesday afternoon. In a busy week for data, the weekly jobless total is scheduled for Thursday, and on Friday, December’s Industrial Production and Retail Sales are released alongside the Sentiment reports from the University of Michigan. Jerome Powell and Lael Brainard are scheduled to give their confirmation testimonies on Tuesday and Thursday and have an opportunity to comment on inflation when they do.

EURO.

The euro has opened the year in a narrow range against the dollar and sterling, with a bias towards weakening. With Omicron cases still increasing, reaching in excess of 300,000 a day in France, the European Central Bank will continue to diverge in policy to the other major central banks. But with eurozone inflation picking up to 5% in December from the previous month’s 4.9%, the ECB is starting to come under more pressure, in particular from Germany, to review their narrative that the rise in inflation is transitory. In defence of their policy, the jump was primarily due to a spike in energy prices which climbed by 26%. Until they change their stance, the continued divergence of approach will make the euro attractive for traders to borrow and sell in what is known as a “carry “trade keeping a lid on any upside potential for the single currency. A relatively quiet week for data starts later this morning when Sentix publish their Investor Confidence survey and Eurostat release the November Unemployment Rate for the eurozone. Later in the week, on Wednesday, Industrial Production is released for the bloc, and on Friday, the Eurozone Trade Balance. Christine Lagarde is due to speak tomorrow morning, as is Frank Elderson on Thursday afternoon.

CNY.

China is tightening pandemic controls over Tianjin, a city of 14m people near Beijing, as its zero-Covid-19 strategy is tested by the country’s first discovery of community transmitted cases of the Omicron coronavirus variant. Over the past day, Chinese authorities strengthened travel controls, closed schools and instituted a series of local lockdowns in the city about 120km south-east of the Chinese capital, state media reported. The stumble by Chinese equities at the start of 2022 has forced regulators to promise supportive measures in a bid to calm market jitters.

CAD.

The CAD pounced on the slip in the US dollar following December’s payroll data and the strong Canadian employment figure to rise to levels last seen at year-end when the greenback sold off heavily across the board. This morning, with events light for the loonie this week, the currency is trading relatively flat along with US equity futures despite the rise in US yields again this morning. The reaction in Canadian bond markets and North American equity indices will likely prove pivotal in determining how CAD trades today as European investors refrain from taking a position, especially one that forces the currency to fresh near-term highs, this morning.

GOLD.

Gold is posting small losses while ranging below $1,800 so far this Monday, as holiday-thinned market conditions combined with a broad-based US dollar rebound offer headwinds to bulls. Traders also turn cautious ahead of this week’s US inflation data, as the Fed appears behind the curve after Friday’s upside surprise in the wage growth numbers.

The headline US Nonfarm Payrolls triggered a sharp sell-off on Wall Street indices, especially tech-heavy indices, sending the greenback south across the board and thereby lifting the gold price.

STOCKS.

Stocks in Europe were steady with U.S. futures Monday as investors brace for bond-market volatility and stimulus withdrawal. Cyclical stocks like energy and banks tied to economic expansion were among the biggest gainers on the Stoxx Europe 600, offsetting declines in technology firms and real estate. Contracts on both the S&P 500 and Nasdaq 100 inched upward. Markets face increasing volatility as investors grapple with how to reprice assets as the pandemic liquidity that helped drive equities to record highs is withdrawn.

CRYPTO.

They call it bitcoin’s “death cross” – a bearish indicator which appears when the 50-day moving average (MA) dips below the 200-day MA. The ominously-named chart pattern looks set to be confirmed this week amid mounting concerns of faster liquidity withdrawal by the U.S. Fed, a bearish development for bitcoin and asset prices, in general. Bitcoin peaked near $69,000 on Nov. 10 and has declined nearly 40% since. The cryptocurrency slipped over 12% in the last seven days to Jan. 9, registering its biggest weekly drop since early December. The impending death cross, coupled with the souring macro outlook, may bolster overall bearish sentiment.

OIL.

Oil fluctuated after recording the biggest weekly gain in a month as supplies returned in Libya and Kazakhstan, and investors tracked China’s handling of its first community spread of omicron. Brent crude was narrowly higher after swinging between gains and losses. The global benchmark rose more than 5% last week and touched $83 a barrel, the highest level since late November. Libyan production rose to 900,000 barrels a day after pipeline maintenance was completed, while some output was restored in Kazakhstan following widespread unrest.

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