Swissquote Bank: Could Lagarde push back the hawks?

October 28, 2021

By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

There is a lot of mixed news and an uncertain appetite in the marketplace. We saw the S&P500 coming down from an all-time-high, and Nasdaq closing perfectly flat after having traded at a fresh record for the second day in a row.

Most of the optimism is due to strong corporate earnings this week, because besides that there is not much of a good news on the wire. First, there is still no deal on Biden’s spending plan, then there is news of rising COVID-19 cases in China.

Then, we saw a collective and an aggressive repricing of the central bank expectations in the bond markets yesterday. Bond traders sold shorter term bonds and bought longer term ones, as they increased bets on a more hawkish policy stance from central banks.

We have been already seeing the US 2-year yield, which was rising exponentially since the beginning of the month, hit 0.50% yesterday, while the 10 and 30-year yields plunged 7 and 10 basis points respectively. There has been a similar flattening in Canadian curve on rising expectations that the Bank of Canada (BoC) could raise interest rate as soon as April, while the first rate hike was rather expected to come in the second half of next year, and not before. And the British 30-year fell the most since March 2020.

So overall, the gap between the short and the long-term yields in some major markets plunged, and that including the German yield spread. And that’s important because, even with the European Central Bank (ECB) trying to keep cool faced with the rising inflation, investors bet on an earlier rate hike from the Europeans as well.

Today, the ECB will announce its latest verdict. But even with the rising pressure from the hawks, the FT writes that Christine Lagarde would push back on market bets of Eurozone raising rates. Yet, we know that the risks remain tilted to the hawkish side, meaning that if inflation remains strong, something has to give… and that would be the doves!

In terms of pricing, the EURUSD finds it hard attracting buyers above the 1.16 mark, yet the bears are not convinced enough to push the pair below the 1.15 either. Given the ECB hawks that have been laid back by Lagarde, and the pressure on shorter term yields, there is a higher potential for a rebound than for a decline in the medium run for the euro, but today, Lagarde will certainly do her best to push back the bets of a rate hike, and that could weigh on the single currency in the immediate future.

There is one place the inflation expectations remain low and that’s Japan. The Bank of Japan (BoJ) kept its policy unchanged and said that the inflation will likely remain below the 2% target for at least two more years and they said they delay the stimulus withdrawal.

What a dream statement for Lagarde! But, the inflation situation is not brilliant in Europe unfortunately: eurozone inflation reached 3.4% in September and is forecast to hit a new 13-year high of 3.7% in October.

On the energy front, we saw a stronger than expected build in oil inventories in the US last week. The latest EIA data showed that the US oil inventories rose by 4.3 million barrels last week, twice as much as the expectation of a 2-million barrel rise, and the data got the bears up and trading.

The barrel of US crude fell sharply below the $ 82 mark, but the price should rebound as fast as it tanked, given the strong positive momentum, which is backed by strong fundamental factros such as rising global demand and tight supply.