Daily Market Outlook, November 25, 2021

Overnight Headlines

Fed Officials Stress Flexibility On Taper Pace At Last Meeting
US Put Chinese Companies Aiding Military On Trade Blacklist
Israel Warn White House On Striking Nuclear Deal With Iran
Russia Move Forces To Crimea In Ukraine Build-Up, Analysts
China Urge Local Governments Spend More To Offset Slump
Japan To Show Budget In $312Bln Spending To Tackle Covid
Bank Of Korea Raises Rates Again, See Faster 2022 Inflation
RBNZ Orr Signal Cautious Policy Approach With Small Steps
EU To Delay Contentious Rules On $59Tln Securities Market
UK Dial Down Brexit Threat While Progress Made In EU Talk
German Covid Deaths Pass 100,000 As Infection Still Spiking
OPEC Forecasts Releases May Greatly Swell Global Surplus

The Day Ahead

Asian equity markets are mixed this morning. Minutes of the November US Federal Reserve monetary policy meeting showed that there was a discussion of the possibility of speeding up the pace of ‘tapering’ of asset purchases if it appeared that inflationary pressures are building. Comments by Fed policymaker Daly indicated that she was open to this possibility but wants to see upcoming data.

In Germany the centre-left SPD appear to have agreed terms with smaller parties to form a coalition government. The latest reading for German consumer confidence slipped by more than expected, possibly due to concerns about the recent rise in Covid cases.

Today is Thanksgiving in the US, while there are also no data releases of note elsewhere to interest markets. However, several speeches from central bankers are scheduled, which will be watched for further clues on the interest rate outlook. In the UK, Bank of England Governor Bailey will speak at an event which is described as a “conversation” with high profile economic pundit Mohammad El Erian. As the latter has criticised central banks for being slow to react to the current rise in inflation, Bailey’s response will be interesting.

BoE policymaker Haskel will also speak today but his remarks are part of a seminar on productivity and structural change and so he seems unlikely to say anything about the immediate outlook for interest rates. In remarks earlier this week, he confirmed that while he still thinks the current inflation rise is largely ‘transitory’, but he nevertheless does expect a modest interest rate increase will probably be appropriate. However, it was less clear whether he would vote for one in December.

The European Central Bank continues to push back harder than most other central banks on prospects for an interest rate rise next year. That was clearly a key message from the ECB’s last policy update in October and today’s minutes of the meeting are expected to confirm that. However, there will still be interest in whether they show any sign of that consensus cracking. There are also several ECB speakers today including ECB President Lagarde.

The Swedish Riksbank is another central bank that has played down the likelihood of an early tightening in monetary policy and today’s update is expected to continue to take that line. The Riksbank seems more concerned that any hint of a shift in policy push up the krona rather than with near-term inflationary pressures. Consequently, its message is likely to still be that interest rates are unlikely to rise until very late in 2024 at the earliest.

After a volatile day’s trading yesterday ended with longer-dated government yields slightly down in both the UK and the US as markets continue to weigh up the potential impact of a tightening in monetary policy

Credit Agricole Month End Model

Global equity markets were somewhat mixed during November. In FX, the USD has outperformed across the board on the month. Overall, the moves in equity markets, when adjusted for market capitalisation and FX performance this month, suggest month-end portfolio-rebalancing flows are likely to be mild USD selling across the board with the strongest sell signal in the case of the USD vs SEK.

Our corporate FX flows model is further pointing to EUR buying at the end of the month. In our combined strategy, we therefore use the signals of our corporate flows model and buy the EUR vs an equally-weighted basket of USD and GBP.

As detailed in our report Month-end rebalancing model upgrade, the month-end rebalancing model generates FX trades on the basis of two signals. The first is based on the performance of US stock markets relative to the rest of G10 adjusted for changes in exchange rates and market capitalisation (Figure 1). In particular, we allocate weights to create a portfolio of the nine G10 USD-crosses. In that, we use the signals’ relative strength to determine the portfolio weights (Figure 2).