December 14, 2021

“The greenback scaled a one-week high against most major rivals on Tuesday, supported by expectations of a hawkish Fed meeting this week and haven demand amid continued uncertainty about the Omicron variant. The US central bank is expected to announce it will wrap up its bond buying stimulus sooner than previously communicated, potentially setting up earlier interest rate increases next year.”

Sam Cornford, Partner and Head of Trading

Main Headlines

White House officials are pushing hard to salvage the $1.75bn Build Back Better Bill, aiming to get the legislation passed before Christmas, as concerns around inflationary pressure across the economy have halted the Bill’s progress. The White House needs to convince Democrats holding out over concerns that excessive fiscal spending could irreversibly damage the economy if inflation persists on consumer goods and energy prices. On Monday afternoon, the US president spoke with Joe Manchin, the Democratic senator from West Virginia who has proved a frequent obstacle to passing Biden’s domestic agenda. Both men made positive statements that progress could be made but the fate of the legislation remains uncertain with less than two weeks to go until Democrats’ self-imposed deadline to pass it before Christmas.

The UK’s eight biggest lenders passed a stress test by the Bank of England, as the central bank reimposed a requirement for lenders to keep a ‘rainy day’ fund – known as a “countercyclical buffer” – amid uncertainty created by the Omicron variant. The eight banks could withstand a near tripling of national unemployment, a sharp fall in property prices and a large economic contraction, the Bank of England said, as it gave lenders a clean bill of health almost two years into the coronavirus pandemic. The exercise did not specifically examine the impact of the Omicron variant, but officials said they had considered a much more severe pandemic scenario than that which played out for most of 2021.  The central bank did not carry out a stress test in 2020 due to disruption caused by the pandemic, meaning this was the first one to occur for two years.

GBP

The pound is weaker than the dollar and stronger than the euro this morning. The UK’s Health Security Agency estimated that Omicron infections are running at 200,000 a day, well above the number of confirmed cases. Boris Johnson set a target for all adults to receive a booster shot by December 31st to slow down its spread. The CIPD, the professional body for HR and people development, warned that the Statutory Sick Pay (SSP) system is broken and needs urgent reform. It finds that nearly two thirds (62%) of employers agree that the SSP rate is too low and should be increased. Many of the country’s lowest paid and most vulnerable workers, who likely need the most financial support, are excluded from accessing SSP. Amid concerns growing about the Omicron variant, the CIPD says steps must be taken to ensure SSP provides a better financial safety net.

EUR

The euro is lower most majors overnight. Gas prices across Europe are on course to return to record highs after Germany said a controversial pipeline from Russia could not be approved amid deepening tensions on the Ukrainian border. The German foreign minister, Annalena Baerbock, said the Nord Stream 2 pipeline could not be given the green light in its current form because it did not meet the requirements of EU energy law. In response, Europe’s benchmark gas price climbed by around 10% on Monday to a high of €116.75 (£142.56) per megawatt hour (MWh), just shy of the record closing price of €116.78/MWh set in early October, according to market price data from ICIS. Europe has experienced record high gas prices in recent months owing to a global squeeze on gas supplies. This has been compounded by a slowdown of Russian gas exports to the continent as negotiations over Nord Stream 2 have stalled.

USD

The dollar is well bid against most majors in the early morning trade. The Federal Reserve is set to chart a path of higher interest rates tomorrow for next year as policymakers show their hands on just how soon and how much they think borrowing costs will need to increase to keep the economy on an even keel. Fed Chair Jerome Powell has already flagged the rate-setting committee will likely announce at its policy meeting this week that it will accelerate the end of its bond-buying program, wrapping it up by March instead of June, in order to clear the way for the Fed to lift off interest rates from near zero, where they have been held since March 2020 when the coronavirus pandemic triggered a short but deep recession.

Markets

Stocks fell Tuesday and U.S. equity futures wavered amid caution over economic risks from the omicron virus strain and central bank efforts to curb high inflation. Treasuries and the dollar held gains. MSCI Inc.’s Asia-Pacific share index fell for a third session, with Chinese property and technology stocks struggling. Concerns about Beijing’s crackdown on China’s indebted property sector have flared anew, hurting sentiment. The nation’s real-estate downturn likely sapped economic activity in November. S&P 500, Nasdaq 100 and European equity contracts fluctuated. The S&P 500 slid on Monday from a record and the tech-heavy Nasdaq 100 underperformed. Treasury yields held a decline that was led by the 30-year bond in U.S. trading. Traders are bracing for the Federal Reserve to taper stimulus more quickly and signal an interest-rate liftoff in 2022, both potential economic challenges.

Main Economic Data/ Central Banks/ Government (All Times CET)

8:00 a.m.: U.K. Nov. jobless claims change, Oct. weekly earnings
9:00 a.m.: Riksbank climate report
9:30 a.m.: Sweden Nov. CPI
11:00 a.m.: Euro-area Oct. industrial production
12:30 p.m.: BOE’s Breedan and Foulger on financial stability report
2:00 p.m.: Hungary central bank rate decision
Bloomberg Technology Summit: Pandemic Powers
U.S. FOMC starts policy meeting
API U.S. oil inventories
IEA monthly oil market report

Corporate Events

Earnings include Pepco, BG Financial, Kobe Bussan, Colruyt

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