Markets ended last week at a classic risk aversion framework. This morning in Asian trading, there were tentative signs that risk aversion might be slowing. However, European markets almost immediately reverted to last week’s habits. Growing risks from the Russia-Ukraine conflict and markets pondering the path the Fed will chart for more aggressive and faster policy normalization later this week continue to haunt investors in riskier assets. Sell in the Euro Stoxx 50 accelerated after the index last week fell below the 4231 neckline. the The Eurozone’s January PMI showed a mixed picture. The title the composite index eased for the second consecutive month from 53.3 to 52.4, slightly lower than expected. The spread of the omicron variant according to Markit has had an increasing impact on the region’s economy. In particular, activity in the services sector slowed (from 53.1 to 52.1). Even so, Markit still calls the setback due to omicron rather muted. On the other hand, Reduced supply chain delays provided welcome support for manufacturing (59.0 vs. 58.0). Average selling prices in both manufacturing and services matched the survey results historical record. At the same time, input prices in the manufacturing sector are showing signs of slowing raw material costs. As for individual countries, activity in Germany surprisingly accelerated from 49.9 to 54.3 (composite) with improvement in both manufacturing and services. Still, the data failed to change the depressed mood among investors. Selling in stock markets is even gaining momentum when US traders are involved. The EuroStoxx 50 lost 3.75%. US indices appear open with additional losses of up to 2.30% (Nasdaq). Risk aversion is keeping core bond markets at a better bid despite expectations of faster Fed tightening. US yields fall with the belly (5 & 10yrs down >4bps) outperforming the wings (2.5bps and 1.6bp for the 30yrs and 2yrs respectively). German yields are down 3.5/4.0 basis points across the curve. The 10-year rate is revisiting the -0.10% support zone. So far, intra-EMU spreads are little affected by the global risk aversion trade. This also applies to Italy, where the parliament will decide whether Prime Minister Draghi will be appointed president (Italian 10-year gap against Germany 1bp wider, in line with the rest of Europe). Post-opening, stronger Brent Crude Oil also dampens recent cycle highs which are currently trading in the mid $86 area.
Currency markets do not fully revert to a standard risk aversion reaction function. The Yen outperformed early in European trading, but the Dollar easily restored balance, with USD/JPY even currently trading in positive territory (113.90). The trade-weighted DXY index is back above 96. The euro is suffering. Near 1.13, EUR/USD risks falling below an uptrend channel. the Swiss franc was initially the preferred safe haven for Europeans. EUR/CHF tested the big figure of 1.03, but rebounded. Is the SNB (finally) coming to the fore? EC currencies (CZK, and even more PLN and HUF) are all facing growing headwinds despite expectations of more interest rate support.
Polish (real) retail sales increased by 14.8% M/M and 8% Y/Y in December, below the consensus (14.9% M/M and 9.6% Y/Y). The biggest increase came from sales of textiles, clothing and footwear. After eliminating seasonal factors, retail sales at constant prices in December 2021 decreased by 3.4% compared to November 2021. The Polish zloty lost a lot of ground today, but it is mainly due to risk-free market environment. NBP Governor Glapinski’s hawkish comments over the weekend can’t fight this backdrop. EUR/PLN goes from 4.53 to 4.56+.
UK composite PMI for January unexpectedly fell from 53.6 to 53.4 while the consensus expected an increase to 54. The manufacturing (57.9 to 56.9) and services (53.6 to 53.3) indices fell and are below forecasts. The Omicron wave meant a third sharp drop in the hotel sector, but this one should be brief with restrictions now relaxed. Business confidence in the outlook has picked up, stimulate strong and sustained job growth. Inflationary pressures remain elevated at near-record levels, increasing the likelihood of follow-on rate hikes from the BoE. EUR/GBP retested the resistance at 0.8381 in today’s hostile risk environment.