MARKET WRAPS
Stocks:
European markets were in full hangover mode Friday, after the brief post-Fed euphoria that seized investors, on the apparent determination of the world's major central banks to ignore for now the possible threat of the Omicron variant, and focus instead on inflation risks.
Central bankers' hawkish tilt, after the Federal Reserve's decision Wednesday to accelerate the end of quantitative easing and to pencil in three interest rates increase for next year, and the Bank of England's own rate increase from 0.1% to 0.25%, finally caught up with investors.
The Central Bank of Japan Friday however seemed to side with the European Central Bank by striking an overall dovish tone, even as it announced it would pull back some of its emergency pandemic funding. Haruhiko Kuroda insisted that monetary stimulus would continue, and that borrowing costs would remain low in the months to come.
"Inflation risks have become too big an elephant in the room to ignore by central banks (...) The main difference between them is how much of a downside risk they attach to the current developments of the pandemic," ING analysts wrote.
Investors were also bracing for more volatility in the months ahead, as central banks pull the extraordinary liquidity they unleashed on markets in the last two years to help the world economy counter the impact of the Covid-19 pandemic.
The ECB adopted a more hawkish tone on monetary policy than Jefferies analysts had expected, but this should be seen as positive for southern European banks, they said.
In the short term, some banks, such as Spain's Sabadell, will be harder hit by a nonrenewal of the ECB's TLTRO bonus rate--an accommodative measure--whereas the likes of UniCredit and Bankinter will be less affected by this.
Longer term, however, the central bank's move toward policy normalization should put upward pressure on the Euribor, which has positive margin implications for southern European banks. "Euribor remains a key sensitivity for S.Europe banks and a 20 [basis-point] increase could more than compensate the loss of TLTRO on our estimates," Jefferies said.
Data in focus: The high level of U.K. retail sales in November likely reflects consumers purchasing Christmas presents earlier than usual due to warnings about product availability, Pantheon Macroeconomics' chief U.K. economist Samuel Tombs said. Retail sales volumes rose 1.4% month-on-month in November. Looking ahead, retailers appear to be relatively unaffected by Omicron, Tombs said.
Footfall in the week ending Dec. 11 was only 1% lower than the previous week, according to Springboard. Retail sales might even pick-up in January, if households avoid services venues due to concerns about catching Omicron, Tombs said.
Households also have amassed excess savings equal to nearly 9% of GDP which they can draw on to finance expenditure over the next year, if they become confident again, he said.
Another drop in the monthly Ifo Business Climate Index for Germany suggests the economy has come to a standstill at the turn of the year, ING's global head of macro Carsten Brzeski said.
"Despite a strong start to the fourth quarter in terms of industrial activity, ongoing supply-chain frictions, higher inflation in general, and higher energy and commodity prices in particular, don't bode well for the short-term outlook for the German economy," Brzeski said.
The deterioration of the public health crisis could push the economy to the brink of stagnation, or even into a technical recession, the economist said. But previous government stimulus, plus the new government's investment policies will unfold in 2022, leading to a stellar growth performance, ING forecasts.
U.S. Markets:
Stock futures paused, while technology companies looked set for further losses, as investors assessed the potential impact on inflation and growth from policy shifts by the world's largest central banks.
Investors are assessing the outlook for 2022 after a week of significant changes to global central banks' monetary policy. Market participants broadly welcomed the Federal Reserve's move to speed up the tapering of its pandemic-era stimulus measures, paving the way to raise interest rates next year. But concerns have turned to the knock-on impact to economic growth, while fast-growing tech names have been pressured by the prospect of higher interest rates.
It also didn't entirely dispel investors' concerns about inflation, said David Donabedian, chief investment officer at CIBC Private Wealth. The central bank may need to signal an even faster pace to rate rises early next year, if data suggest inflation is quickening still, he said.
"The underlying, primary fear in the market is inflation. What the Fed did is the old saying: to solve a problem you have to first acknowledge there is one," he said. "It's a wise move but just a temporary respite for the markets' concerns over inflation.
Forex:
The dollar should stay firm over the holiday period, UniCredit said after the Fed this week flagged the prospect of interest rates rising three times next year, while rates in the eurozone are unlikely to rise next year.
"Given the hawkish Fed turn that emerged at the FOMC meeting, we expect the dollar to remain broadly firm throughout the holiday season, helped by prospects of interest-rate differentials moving further in its favor, " UniCredit said.
There is room for EUR/USD to fall further, albeit slowly after the ECB said it would gradually reduce asset purchases next year, it said.
The Russian ruble pared gains after the country's central bank raised interest rates as expected. Russia's central bank increased its key rate by 100 basis points to 8.5%, within the range of the market's expectations.
The bank said it holds open the prospect of further rate rises at upcoming meetings. It said inflation is developing above its October forecast but expects inflation to ease to 4.0%-4.5% by late 2022 and remain close to its 4% target further on. USD/RUB rises to 73.7366 after the decision, from 73.5860 beforehand but is down 0.2% on the day.
Bonds:
Commerzbank expects government-bond curves to diverge further after this week's series of central bank meetings, said Christoph Rieger, head of rates and credit research.
The front-end of the euro yield curve is well protected, peripheral government bond yield spreads are more at risk, while U.S. real yields are higher amid a Fed that is determined to get ahead of the curve, the strategist said.
The Bank of England is expected to raise its base interest rate again in February after a surprise increase Thursday, said Mizuho. It expects the BOE to raise rates by 25 basis points in February and by another 25 basis points in August. Noting that the market is pricing three 25 basis-point increases in 2022, Mizuho expects rate rises will be more gradual than this but that the BOE will eventually raise interest rates higher than the market is currently pricing in.
The yield on the 10-year U.K. benchmark government bond is likely to more than double from current levels by the end of next year, said Mizuho. "Our end-2022 call for 10Y Gilt [yield] is 1.53%," analysts at the bank said.
They are also forecasting a selloff in government bonds due in more than five years. The selling will be more pronounced in 30-year gilts as the wind-down of quantitative easing and higher foreign-exchange hedging for foreign investors materially changes the supply-demand picture, they said.
European credit risk premiums remained stable despite the ECB's slightly more hawkish-than-expected announcement on the phasing out of bond purchases, saidUniCredit. Yet it doesn't substantially change the Italian bank's view that the ECB will buy up to EUR 6bn of net corporate bonds per month on average in 2022, down from a average of slightly less than EUR 7bn this year.
"This should still be enough to cover fully or almost fully the expected net senior bond issuance from non-financials of EUR 67-87bn, taking supply pressure off the market while keeping central-bank liquidity abundant," the bank's analysts said.
BlackRock remains short German and U.K. duration and is long Spanish government bonds in their flagship global unconstrained bond fund, Marilyn Watson, head of global fundamental fixed-income strategy, said after a series of central bank policy meetings this week. U.K. gilt yields rose after the BOE raised its key policy rate to 0.25% from 0.10% in a move Thursday that was unexpected by many market participants.
The selloff in gilt yields sparked a selloff in eurozone government bonds as well, which was accelerated after the ECB provided markets with clarity on the future of its asset purchases.
Commodities:
Oil prices were down, with both benchmarks on course for moderate losses this week. In the course of the week, China's easing energy crunch and worries about the spread of the Omicron coronavirus variant have offset the continuing economic recovery outside of China and the threat of a sudden move by OPEC+ to cut production or pause production increases, said OANDA's Jeffrey Halley.
"That has left oil markets looking for a more settled equilibrium price until the narrative convincingly changes one way or the other," he added.
Gold prices are set for their best weekly performance in five weeks after the Fed's move to speed up its tapering. Gold is on course to end the week up 1.4%, putting it on course for its best week since the week commencing Nov. 5.
Copper was higher after production at a major mine in Peru was halted amid protests by locals. Miner MMG said Thursday that it would shut down production at the Las Bambas copper mine after it failed to reach an agreement with local activists.
Locals have been blockading the mine since late November, saying the mine is helping pollute their crops. Las Bambas is a major producer and helps make Peru the world's second-largest supplier of copper.
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12-17-21 0637ET
