• Markets started the week with a Chinese inspired, admittedly modest, risk-off. The reaction of authorities to a new wave of Covid infections raised questions on an easing in the country’s zero-Covid policy. The change in sentiment on Chinese markets also illustrates that good news which, together with lower interest rates, supported the recent risk rally remains fragile and can turn from one day to another. Will Chinese production/demand recover as hoped for? Will a less harsh European winter prevent an sharp economic downturn? Will global growth succeed the hoped for soft landing despite tighter global monetary conditions? Answers to these and other questions remain highly uncertain and can change instantly. Whatever, risky assets see the glass half empty rather than half full today. Chinese equity indices lost up to 1.87% (Hang Seng) with modest spill-over effects on EMU (EuroStoxx -0.3%) and US markets (mixed to modestly lower, Nasdaq -0.4%). Uncertainty on global demand also weighs on cyclical commodities like copper (-1.0%+) or oil with Brent declining further to $84 p/b).
• The ‘risk-off’ repositioning at least brought clarity on the fate of the dollar. The recent correction has gone far enough. The Fed might slow the pace of rate hikes in December, but remains a frontrunner in the anti-inflation campaign. After tentative signs of bottoming last week, the DXY jumped from an open sub 107 to currently trade near 107.75. EUR/USD’s failure to close last week above the 1.0350/68 area caused USD shorts against the euro to throw the towel. At 1.024, the pair again fell prey to the forces of gravity and is at risk of falling below an uptrend line in place since early this month. No safe haven allures for the yen, with USD/JPY decisively returning north of 140 (cur.141.5). In this respect, the Swiss franc performs better with EUR/CHF easing back to the 0.981 area. Sterling is holding up fairly well. EUR/GBP dropped below minor support near 0.869 to currently trade at 0.8675, but the short-term consolidation pattern in place since early October remains firm.
• Interest rate markets initially didn’t show a clear directional trend, but yields finally turned south as US traders joined. US and German yields lose 3/5 bps. European swaps are ceding 5 (2-y)/8 (30-y) bps. ECB talk included an MNI-interview with ECB Lane who stroke a balanced tone. He acknowledged that there might still be additional follow-through from higher energy prices into retail prices. Supportive fiscal policy also has implications for inflation and wages are rising above normal. However, with respect to the pace of further rate hikes, Lane indicated that, even as further steps are necessary, the case for a next 75 bps step has become less strong after the tightening the central bank has already done earlier this year. He didn’t give clear hint on the peak cycle rate.
• Swedish home prices plunged by 3% m/m in October, Sweden’s Valueguard housing index revealed today. The drop increases the peak-to-trough decline to 14%, bringing it already close to the Riksbank’s expected 18%. One of Europe’s hottest housing markets is now in the worst rout since the 1990s amid soaring inflation and mammoth rate hikes by the Riksbank to counter it. At its meeting in September, the central bank raised the policy rate by 100 bps to 1.75%. It is expected to deliver another 75 bps move later this week. Sweden’s housing market and indebted households have long been a concern for regulators and the Riksbank. The issue is increasingly acute with declining house prices combined with rising – and often variable – mortgage rates impacting consumer balance sheets and spending. It may prompt the Riksbank to shift to a lower tightening gear after Thursday. EUR/SEK tested the 11 big figure today but is currently trading just south of that level.
• Czech National Bank deputy governor Mora said inflation may accelerate slightly again after having printed a sharp decline to 15.1% y/y – thanks to government energy subsidies. He does expect price growth to be near its peak and to slow dramatically next year. Mora added that he wanted to lift rates at the previous meeting by 75 bps to bring inflation back to 2% as quickly as possible, even if it comes with a recession. But he found no majority support. The CNB deputy governor does not expect interest rates will rise at his final two meetings in December and February. EUR/CZK depreciates marginally today from an intraday high around 24.40 to 24.34 currently.