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European stock markets rallied on Friday morning, spurred on by solid bounce on Wall Street that saw the S&P 500 and Nasdaq close at fresh record highs. Big tech drove the steers with strong hand, with Apple up +2% and now +6% for the week; whilst energy and financials were lower. Losses for Cisco weighed on the Dow, which closed in the red. This morning, miners led the way higher on the FTSE 100, whilst Ocado caught the eye with a 6% pop, apparently on speculation Marks & Spencer could be saving its pennies to buy out Ocado’s UK retail arm, of which it is a 50% shareholder. Could happen, seems like a natural evolution to ultimately split the two businesses once the international deals actually start delivering some free cash.


It should be noted that we are not seeing a lot of real thrust in the market, rather a bit of chopping around the cycle/record highs. Path of least resistance is upwards for the US market with real rates providing only one option in stocks. Momentum in EV darlings Rivian (-15%) and Lucid (-10%) skidded to a halt and reversed as abruptly as a Tesla on autopilot trying to make a left turn. EM has been weak, underscored by the record low for the Turkish lira. China tech still under pressure after Alibaba plunged 10% after warning on slower growth, though Asian shares were mainly higher.  


Bonds are steady with US 10s at 1.6%, whilst the dollar is firmer this morning after a pullback yesterday following Wednesday’s 16-month high. Gold is a tad light at $1,850, whilst crude prices are recovering some ground with WTI touching $79 after taking a $76 handle yesterday. Bitcoin is weaker again with sellers still in control and prices testing the $55k support area. 


Later today the US House of Representatives will vote on Biden’s roughly $2tn Build Back Better social spending plan. Fed speakers today include Waller and Clarida, after Bostic yesterday said the Fed would be likely to raise rates next summer. 


More inflation: This time German producer price inflation surging by 3.8% in October – factory gate inflation now stands at 18.4% on an annual basis. I’m sure that fresh lockdowns in Germany (only for the unvaccinated) will only add to the kind of pressures that businesses are reporting, so inflation remains sticky. Stripping out energy (+48.2% yoy), the print came in at 9.2%. 


No relief for the euro though, despite the huge PPI print, as the single currency fell in early trade after Christine Lagarde, the European Central Bank chief, once again sought to kill off any last vestiges of speculation that they might hike next year. Lagarde is ruling out 2022, which given the economic recovery, fiscal stimulus and super-high inflation (CPI running at 4.1%), kind of beggars belief.  Lagarde layered it on pretty thick:  “Supply bottlenecks cannot be solved by the ECB’s monetary policy.” But of course, but at the same time you are completely dissociating ECB policy from any kind of inflationary impulse we are seeing now. Kind of cognitive dissonance that is peculiarly central bank in nature. It underscores the divergence in mon-pol among global CBs that is going to drive increased FX volatility – you may be pleased to see it. 


South Africa’s Reserve Bank yesterday raised the main repo rate by 25bps to 3.75%, with the prime lending rate rising to 7.25%. Market participants had been split on whether the central bank would tighten monetary policy ahead of the decision, after the SARB had flagged inflation risks last month. In the end the vote was 3-2 in favour of hiking rates, the first time they have risen in three years.  


In a statement the bank noted that “inflation risks have increased and the level of policy accommodation remains high”. This describes the situation in the US, UK and Europe aptly but so far only the Bank of England is close to hiking – governor Lesetja Kganyago said the decision was not an attempt to pre-empt what advanced economies will do.  


Indeed, the decision underscores the fact that global CBs are entering a multi-speed phase where we will see divergence in monetary policy and, as a result, divergent bond yields and greater volatility in FX markets. As economies exit the pandemic at different speeds and with a different set of inflationary pressures, central banks are in a less coordinated policy stance than at any time for the last 18 months. This is clearly on show in the directional pivot we have witnessed in the EUR as markets push back their rate hike expectations.  


The implied policy rate path of the Quarterly Projection Model (QPM) from SARB indicates an increase of 25 basis points in the fourth quarter of 2021 and further increases in each quarter of 2022, 2023 and 2024. That is one heck of a hiking cycle. SARB said that “a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates”.  


This is important – as inflation takes off – even for reasons that are beyond your control (supply side), then the role of the CB is to make sure that inflation expectations do not become unanchored, which in turn fuels further, more persistent inflation. 


Contrast this with Turkey, where the CB has gone into full crazynomics by slashing interest rates again. Yesterday the central bank cut its one-week repo rate by 100bps to 15%, a third cut since the 19% in September. It came after president Erdogan said on Wednesday he’d fight to keep rates down. The lira tumbled, with USDTRY hitting 11 for the first time. Rates will have to go back up at some point, hopefully around Christmas time so we get some good headlines.

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