Risk sentiment weaker to start the new week, ahead of busy event calendar, not helped by negative Omicron headlines and surging European gas prices

Markets have opened the busy week ahead with a fall in risk sentiment, with notable falls in global equity markets and global rates and safe-haven currencies outperforming. The NZD has unwound much of last week’s gain to sit just above 0.6750.

There is plenty of event risk on the calendar this week, including policy updates from the Fed, ECB, BoE and BoJ, amongst other central banks, along with some key data releases including China monthly activity data, US retail sales, NZ GDP and Australian employment. That made Friday’s record close on the S&P500 a little surprising, particularly with another incremental hawkish tilt for the Fed likely, later in the week. There has been little news overnight, but investors have adopted a more cautious tone. US equities have tracked lower from the start gate and the S&P500 is currently down 0.7%, while the Nasdaq index is down 1%.

UK PM Johnson warned the UK was facing a “tidal wave” of Omicron infections and called on adults to get a booster shot ahead of the New Year. An Oxford studied confirmed the results of others, that a two-dose vaccine regimen showed a substantial drop in neutralising antibodies when exposed to the Omicron variant compared to Delta, while some participants failed to neutralise the virus at all. China reported its first reported Omicron case, albeit from an overseas arrival rather than in the community.

European and UK gas prices are up in the order of 9-10%, the former surpassing the early-October high to close at a new record, after Germany hardened its view on the Nord Stream 2 gas pipeline. The German foreign minister said it didn’t comply with EU law and that the build-up of Russian troops on the Ukrainian border was “also a factor”. The read-through is that geopolitical factors are clearly an issue. It suggests little relief on additional gas supply required as winter takes hold, raising the prospect of power shortages and much higher costs for consumers and businesses across the region. The vulnerability of energy supplies could extend into next winter, given the time required to rebuild low gas inventories.

The risk off tone has supported global bond markets, with European 10-year rates down in the order of 3-4bps, while the US curve has flattened again, with a 2bps fall in the 2-year rate and a 6bps fall in the 10-year rate to as low as 1.41%, mind-boggling with annual CPI inflation running at 6.8% over the past year.

Safe-haven currencies have been well-supported, including JPY, CHF and the USD. Commodity currencies are at the bottom of the leaderboard. The NZD and AUD are down 0.6% and 0.7% respectively from last week’s close, with much of the fall coming overnight. The NZD went briefly below 0.6750, before finding some support. The AUD trades near 0.7125. While NZD/AUD is a touch higher, the NZD is lower on all the other key crosses, including a move below 0.60 against the euro.

Yesterday, we revised our currency forecasts to show a stronger-for-longer USD profile, as the timing of Fed hikes gets closer and the US economy continues to outperform. While the downward revisions for NZD and AUD were minor compared to EUR and GBP, it does mean that the NZD is expected to continue to languish, and the expected trading range through mid-2022 is about a cent lower at 0.66-0.71.

The domestic rates market was very quiet yesterday, with little trading activity. Global forces saw NZGB yields marked down about 3-4bps in yield, while swaps were flat to 1bps lower.

In the day ahead, there are a few bits on the calendar, but none of the top tier releases due later this week, so they shouldn’t perturb the market – even the expected further surge in US PPI inflation (9.2% y/y), given that this post-dates the CPI data last week.