January 27, 2022

“England returns to Plan A after relaxation of Plan B rules which came into effect this morning. Covid passes and face coverings are no longer legally required but continue to be heavily recommended by Public Health Officials.”

Tim Hallinan – Trading Director

Main Headlines

The Federal Reserve on Wednesday said it is likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month in what US central bank chief Jerome Powell pledged will be a sustained battle to tame inflation. The chair of the Federal Reserve, refused to rule out more aggressive interest rate rises than markets had been expecting. At his post-meeting news conference, Powell said that there is “a bit of room to raise interest rates” without necessarily threatening the labour market. Shortly after his pronouncement, the major stock market averages turned negative. The committee’s statement came in response to inflation running at its hottest level in nearly 40 years. Though the move toward less accommodative policy has been well telegraphed over the past several weeks, markets in recent days have been remarkably choppy as investors worried that the Fed might tighten policy even more than expected. In addition, the committee noted the central bank’s monthly bond-buying will proceed at just $30 billion in February, indicating that program is expected to end in March as well while rates increase.

Rishi Sunak’s latest Budget has contributed to a rise in inflation and there is a risk that current government policy could generate a wage price spiral, according to an influential all-party group of MPs. In its report on the October Budget, the Treasury committee also warned that the tax burden would be higher at the next election than at the last, even if the chancellor offered some sweeteners before people go to the polls. The committee noted that Sunak’s plan for a rise in national insurance contributions from April to clear an NHS treatment backlog and fund social care reforms would raise costs for employers because half of the tax increase is paid by companies, putting pressure on them to increase prices. Several Conservative ministers have called on Sunak to delay or cut the increase. The committee also found that “the large fiscal loosening” in the Budget, with more generous than expected increases in public spending, would also push up prices. Any such move would draw Mr Sunak into conflict with Prime Minister Boris Johnson, who is keen to move on from the austerity era.

GBP

Sterling is weaker than most major currencies in the early morning trade. The Plan B restrictions introduced over the Christmas period due to the rise of the Omicron variant end today. Mask wearing and working from home advice are among those restrictions being removed. Work-from-home guidance ended last week, and measures such as mask mandates and COVID passes, also introduced in England last month, lapsed this morning, returning the rules to where they were last July. British airline easyJet said the Omicron variant of COVID-19 was impacting its performance this quarter, but it expected to see strong demand this summer when its capacity will be near pre-pandemic levels. British Prime Minister Boris Johnson accused the European Union on Wednesday of implementing part of the Brexit agreement covering trade with Northern Ireland in an “insane and pettifogging way”, comments Ireland dismissed as unhelpful. Recipients of benefits under the UK’s flagship welfare scheme will be required to broaden their search for work within weeks of receiving government allowances or face sanctions.

EUR

Euro is stronger against sterling and weaker against the dollar this morning. Replenished firepower and higher interest rates will give Europe’s banks an ideal opportunity this year to reverse recent underperformance and claw back market share from rivals in the United States. European lenders lost ground to Wall Street rivals during the pandemic because volatile markets boosted the earning power of US banks’ outsized trading arms. European rivals earn proportionately more from lending and benefit from a higher interest rate environment. Deutsche Bank on Thursday defied market expectations to post a profit for the fourth quarter of 2021, as investment bank revenues rose. The German lender said profit attributable to shareholders came in at 145 million euro for the final three months of the year, a sixth consecutive quarter of profit and almost triple its profit for the same period in 2020. Denmark and Austria became the latest countries to ease COVID-19 restrictions, following similar moves by Britain, Ireland, and the Netherlands, while other countries in Europe planned new measures to battle record numbers of infections.

USD

The dollar is well bid against most major currencies overnight. As fears of an invasion of Ukraine have grown, US officials said on Tuesday that they had been negotiating with global suppliers, and they were now confident that Europe would not suffer from a sudden loss of energy for heating in the middle of winter. Chip inventory held by manufacturers has plummeted to an average of just five days’ supply, as the global semiconductor shortage continues to wreak havoc on industry, the US Department of Commerce has warned. Insurance payments to US farmers for crops lost to droughts and flooding have risen more than threefold over the past 25 years, according to an analysis of federal data by the Environmental Working Group released on Thursday. Dr Anthony Fauci, the nation’s top infectious disease expert, issued a warning Wednesday that it is too early to consider Covid ‘controlled’ in the US. The director of the National Institute of Allergies and Infectious Disease warned that the current Covid situation is not as optimistic as some officials and experts are saying.

Markets

US equity futures and Asian stocks slid Thursday after Federal Reserve Chair Jerome Powell signalled a March interest-rate lift off and stoked speculation about the possibility of unexpectedly aggressive policy tightening. An Asia-Pacific share gauge sank to the lowest in 14 months, with South Korea set for a bear market, China getting closer to one and Australia off 10% from an August peak. Contracts on the S&P 500, tech-heavy Nasdaq 100 and European stocks tumbled. The Fed fallout erased a Wall Street rally Wednesday. Two-year Treasury yields, cutely attuned to Fed policy, jumped in the US session and were at the highest levels since the pandemic’s emergence. A key part of the yield curve was around the flattest since early 2019, hinting at concerns for growth as the Fed dials back economic support. Jian Shi Cortesi, a portfolio manager at GAM Investment Management in Zurich, argued a better monetary backdrop in Asia could support the region’s equities. Meanwhile, the earnings season continues after an uneven start that also sapped investor sentiment. Shares in Samsung Electronics Co., South Korea’s biggest company, fell after profit missed estimates.

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

8:00 a.m.: Switzerland Dec. watch exports
8:00 a.m.: Germany Feb. consumer confidence
8:00 a.m.: Norway Nov. unemployment rate
9:00 a.m.: Hungary Dec. unemployment
9:00 a.m.: Spain 4Q unemployment rate
9:30 a.m.: Hungary one-week deposit rate
10:00 a.m.: Italy Nov. industrial sales
11:00 a.m.: Hungary sells bonds
11:00 a.m.: Italy sells bills
2:30 p.m.: ECB’s Scicluna speaks
2:30 p.m.: U.S. initial jobless claims, 4Q annualized GDP

Corporate Events

Earnings include SK Hynix, Mediatek, Apple, Visa, LVMH, Comcast, Danaher, Diageo, Mastercard, Blackstone

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