We start this week in a risk on mood with Asian equities creeping higher. At the same time the oil prices surge to three-year high, that could aggravate inflation fears and enforce the recent hawkish turn by some major central banks. The focus this week will be on central bank speeches with Chairman Jerome Powel testifying before Congress on Tuesday and Wednesday. ECB’s annual Central Banking Forum takes place on Tuesday/Wednesday. There is also have a number of speeches from BoE. China’s Evergrande remains a threat to global markets. The company missed a bond coupon payment on Thursday, leaving investors jittery about the chances of the company collapse, which might start a cascading stock market tsunami. In Germany Social’s Democrats’ narrow win over Merkel’ Bloc left German government in limbo. SPD emerged as the largest party with 25.7% votes while CDU/CSU came second with 24.1%.
The S&P closed higher for a third straight session on Friday up 0.2%, erasing the losses earlier in the day after China’s central bank banned all crypto transactions. Nasdaq 100 Index rose 0.1%, while the Russel 200 Index decreased 0.5. The latest hawkish shift by the Fed saw the yields ending last week sharply higher. The 10-year Treasury is at its highest since early July at 1.46%. The lift in yields underpinned the US Dollar with DXY firm at 93.249, just off August’s 10-month high of 93.734. Eyes will be on US fiscal policy with House of Representatives due to vote on a $1 trillion infrastructure bill this week, while a September 30 deadline on funding federal agencies could force the second partial government shutdown in three years. There will be a number of US Federal Reserve speeches this week let by Jerome Powell on Tuesday and Wednesday.
European markets opened higher this Monday with DAX gaining 1%, FTSE 100 up 0.86% and CAC 40 up 0.55%. Olaf Scholz of the centre-left Social Democrats defeated Chancellor Angela Merkel’s conservatives in an extremely tight German election, setting in motion what could be months of complex coalition talks to decide who will lead Europe’s biggest economy. EURUSD is hovering above 1.1700, better bid amid the dollar weakness, as the risk appetite returns on receding China Evergrande fears. GBPUSD remains on the back below 1.37, as Brexit concerns outweigh the market’s optimism. UK PM Johnson is to consider using army to overcome petrol crisis with Britain suspending competition laws. The focus in Europe this week will be on ECB’s annual Central Banking Forum with highlights on Lagarde’s opening remarks, Schnabel heading a panel on the future of inflation and the panel of monetary policy. We also have a number of speeches from BoE, including Governor Bailey. In terms of data, France and Germany will publish CPI on Thursday, while Eurozone CPI are due on Friday.
Asian shares crept higher on Monday with MSCI broadest index of Asia-Pacific shares outside of Japan firming 0.5%. Japan’s Nikkei gained 0.4% on hopes for further fiscal stimulus once a new prime minister is chosen. Chinese Blue chips gained 1.1% as Chinese Central banked pumped more money info financial system and investors hoped that Beijing would limit the fallout from the troubled China Evergrande Group. Concerns that China’s second-largest developer Evergrande could default on its $305 billion of debt has overshadowed recent weeks, but contagion fears have been receding. The risk-sensitive Australian dollar rallied, and the safe-haven yen dipped, as the fears of the contagion have decreased with AUDUSD trading at around 0.7275 and JPYUSD at 100.72.
Oil prices rose for a fifth straight day on Monday with Brent heading for $80 amid supply concerns and demand picking up on easing of pandemic conditions. Brent Crude is up 1.5% at $79.23 a barrel and US WTI up 1.5% at $75.09. Global output disruptions forced energy companies to pull large amounts of crude out of inventories, while a shortage of natural gas in Europe pushed costs up across the continent. OPEC+ have had difficulty raising output as under-investment and maintenance delays persist from the pandemic.