After a stronger open to the new week, European indices turned lower by mid-day in London in an apparent sign that we are heading for a period of risk-off trade. Well, at least in Europe anyway, given that the Nasdaq futures had hit a fresh record high earlier.
While there was nothing on the economic calendar to trigger the move, European stocks slipped as Angela Merkel fanned concerns over the fourth wave of Covid in Europe. The outgoing German Chancellor said the Covid spike in the nation is the worst it has ever been, and this “dramatic” situation needs “tighter curbs,” as hospitals may soon be overwhelmed. This comes after the German health minister also refused to rule out a return to lockdown, adding that Germans will be “vaccinated, cured or dead” by the end of the winter. On Friday, Austria surprised the markets by introducing a fourth full lockdown, not just for the unvaccinated as had been previously planned. Protests against new restrictions aimed at curbing Covid-19 infections have spread across Europe, including in Belgium, Croatia, Denmark and the Netherlands.
The fear among market participant in that fresh lockdowns could be introduced in other parts of Europe, making the road to recovery from the pandemic even bumpier and raising concerns over the efficacy of the vaccines. So, there is now a real possibility we may see at least a short-term correction, as investors wake up to the risks facing the Eurozone economy, after the major stock indices hit repeated all-time highs in recent weeks.
Covid drop unlikely to be repeat of 2020
Although infection rates could accelerate even further and more lockdown measures could be introduced, I very much doubt we will see a sell-off similar to the early parts of 2020 when major economies initially went into lockdowns. The world has adopted to working from home, while medications and vaccines means that the latest wave of infections will hopefully not be anywhere near as severe in terms of fatalities. Furthermore, some central banks are still buying bonds at full throttle, such as the European Central Bank. Speaking of… the ECB will now have more reason to keep its current policy in place even longer. This, in turn, should mean the downside risks are going to be limited for stocks. What’s more, with the euro weakening, this should be good news for European exports.
US stocks in the world of their own
While the European indices struggle amid Covid resurgence here, in the US things appear rather calm. Nasdaq futures traded at a fresh all-time high earlier, with the S&P futures also not being very far from their highs. Wall Street continues to outpace the rest of the world. US investors continue to ignore rising inflation risks and peak growth concerns, with little apparent care given about high valuation of technology stocks either. Perhaps we may see some volatility in the middle of the week, when Joe Biden delivers a speech on the economy on Tuesday or when the US President makes his decision on the next Fed Chair – likely to be on Tuesday or Wednesday, between incumbent Jerome Powell and Vice Chair Richard Clarida.
In terms of the economic calendar, there will be a sudden pickup in data releases in mid-week, ahead of the Thanksgiving holiday in the US on Thursday. So, most of the action will be concentrated in the middle of the week, with the start and finish unlikely to see much volatility in response to macro data. That’s not to say the markets will be quiet, of course. In fact, we have already seen some volatility hitting European markets, following on from Friday.
Monday and Tuesday
As mentioned, there’s nothing significant scheduled for Monday, except US existing home sales. The focus will be on events happening later on in the week, starting with the release of the following data on Tuesday:
- New Zealand Retail Sales – as this is quarterly data, we should see some volatility in the kiwi, although FX traders may be quick to take profit ahead of the RBNZ rate decision that will follow on Wednesday.
- Global manufacturing and services PMIs - PMI data from the Eurozone in particular will be closely monitored given the situation with Covid, with Germany reporting record cases and Merkel warning of “dramatic” situation. Germany has targeted the unvaccinated in their latest attempts to curb Covid infections. Although this is not as bad as a full-blown lockdown, Germany hasn’t ruled the latter out. Even a lockdown for the unvaccinated should still weigh on economic activity. If so, the PMI data will be the first to reveal such weakness – maybe not in the latest PMI data, but certainly in the months ahead. The PMI data will also reveal new information about the supply bottlenecks, prices and wages. Given the fact that inflation is the most important issue for the markets right now, investors will be keen to find out whether the situation is about to get better or deteriorate. The sub-indices in these PMI reports will reveal a lot of information in this regard.
Wednesday will be a big day for the markets, starting with the RBNZ rate decision and culminating in the release of the FOMC’s last meeting minutes. Here’s what’s on tap:
- RBNZ policy decision - As a reminder, the RBNZ raised rates by 25 basis points at its last meeting in October after surprising the market with inaction in August, when the central bank was originally expected to hike rates for the first time since before the pandemic. With the hiking cycled having started and inflation overshooting, there is less uncertainty about a hike this time. The key is will it be 25 or 50 basis point increase in OCR, the benchmark interest rate. With the closely-watched inflation expectations data showing a big rise from 2.3% to 3.7%, a 10-year high, there is a possibility we might see a 0.5% hike, as the central bank aims to bring CPI back to its targeted range between 1 to 3 percent, with a central target of 2% being the ideal level. Such a move, if seen, should send the NZD higher across the board, while a 25bp increase may not trigger a massive move.
- UK Autumn Forecast Statement - The UK Autumn Forecast Statement provides updated economic forecast and a preview for the government's budget for the coming year. For traders interested in the pound and UK stocks, there might be some surprises that they will need to take into account.
- FOMC meeting minutes preceded by US data dump – this includes preliminary GDP (second estimate), durable goods orders, personal income and spending, jobless claims and core PCE Price Index among other things. Wednesday afternoon it will all be about the US economy as we will have some important data to look forward to, including the Fed’s favourite measure of inflation: the core PCE price index. The latter should move the dollar if it shows a big print. Over the past four months, it has stabilised around 3.6% year-over-year. But if it starts to accelerate to the upside again, then this will raise serious question markets over the Fed’s “transitory” inflation outlook. We will also find out exactly how concerned the FOMC was about inflation in their last policy sitting, when they decided to start the taper process. If some policymakers supported a faster pace of tapering because of concerns over inflation, then this may indicate willingness to speed up QE reduction in the months ahead, should inflation or the economy warrant it.
Thursday and Friday
Thanksgiving in the US means Wall Street will be closed, while from Europe there only a handful of macro highlights such as French GDP and ECB’s policy meeting minutes. Pound traders may wish to keep an eye or ear on BoE speakers, Governor Andrew Bailey and MPC member Haskel. There’s nothing significant to look forward to on the last day of the week, particularly with some US investors likely to be making it a long Thanksgiving weekend break and given that Wall Street will be trading for half of the day. Elsewhere, we will have a few not-so-important macro releases on Friday, including Aussie retail sales, Japan CPI and Swiss GDP.
Chart to Watch: EU Stocks 50
After Austria triggered fears about fresh lockdowns in Europe, the major European indices have sold off, causing the Euro Stocks 50 to turn lower as well. Keep an eye on this benchmark as last week’s reversal and the weakness at the start of this week could turn into something more significant than just a hiccup in the bull trend.
Source: ThinkMarkets and TradingView.com
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