“Eurozone Economic Recovery…”

The Eurozone’s economic recovery stumbled in December as new a surging number of COVID-19 infections reduced growth in the bloc’s dominant service industry, showed a survey on Wednesday, and could weaken further if more restrictions come into force.  Governments at the end of last year, imposed measures to contain the infection rates. The IHS Markit’s Composite Purchasing Manager’s Index (PMI) which is a good gauge of the overall economic health sank to 53.3 in December from 55.4 in November, its lowest since March.  While the final reading was below an earlier reading of 53.4, it did hold above the 50-mark separating growth from contraction.  The restrictions imposed to contain coronavirus dampened the activity in Germany’s services sector and the outlook for January.  In France growth came in slightly below an initial estimate as the pandemic weighed however, consumer confidence improved.   The eurozone’s services industry saw growth dwindling and its PMI dropping to an eight-month low of 53.1 from November’s 55.9.  A factory PMI released on Monday, which showed manufacturing activity remained resilient in December, suggested an easing of supply chain bottlenecks had alleviated some price pressures. 

German Retail Sales

German retail sales rose unexpectedly in November data showed on Tuesday, lifting them to a record annual high despite renewed COVID-19 restrictions.  The Federal Statistics Office said retail sales were up 0.6% on the month in real terms.  For 2021, retail sales rose 0.9% in real terms and 3.1% in nominal terms, reaching record highs despite curbs on non-essential visits to the shops.  The Ifo institute expects the German economy to shrink by 0.5% on the quarter in the final three months of 2021 and stagnate in the first three months of 2022.  This would lead Germany close to a technical recession, defined as two consecutive quarters of contraction.     

US Private Payrolls

US private payrolls increased more than expected in December, pointing to underlying labour market strength, however, COVID-19 infections could slow momentum in the months ahead.  The surge in private hiring in the ADP National Employment Report on Wednesday was based on data collected in mid-December in the presence of Omicron variant which caused some events and hundreds of flights to be cancelled.  Private payrolls jumped 807,000 jobs last month, the most in seven months, after rising by 505,000 in November.  The ADP report is jointly developed with Moody’s Analytics and was published ahead of the Labour Department’s more comprehensive and closely watched December’s employment report to be issued on Friday. 

Minutes from December’s FED meeting

Minutes from the Fed’s Meeting held on 14-15 December, released on Wednesday were considered to be more hawkish than expected, weighing on riskier assets and supporting the US dollar and bond yields.  A “very tight” job market and persistent inflation might require the FED to raise interest rates sooner than expected and begin reducing its overall asset holdings as a second brake on the economy, US Central bank policy makers said in their meeting last month.  Furthermore, the minutes showed that FED officials were uniformly concerned about the pace of price increases that promised to persist, alongside global supply bottlenecks “well into” 2022.  The minutes stated, “Participants generally noted that, given their individual outlooks for the economy, the labour market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.  Some participants also noted that it could be appropriate to begin to reduce the size of the FED Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate.”  The language showed the depth of the consensus that has emerged at the FED in recent weeks over the need to move against high inflation, not only by raising borrowing costs but by acting with a second lever and reducing the central bank’s holdings of Treasury bonds and mortgage-backed securities.    “Participants pointed to a number of signs that the US Labour market was very tight, including near-record rates of quits and job vacancies, as well as notable pickup in wage growth, “said the minutes.  “Many participants judged that, if the current pace of improvement continued, labour markets would fast approach maximum employment.”

Oil

On Monday oil prices rose towards $79 a barrel, supported by tight supply and hopes of a further demand recovery in 2022 based on the view that Omicron coronavirus variant is unlikely to significantly dampen the outlook.  Brent crude rose 1.2% to $78.73 a barrel while US West Texas Intermediate crude added $1.03 or 1.4% to $76.24. 

On Tuesday the American Petroleum Institute (API) reported that US gasoline stockpiles rose by 7.1 million barrels in the week to 31 December.  Distillate stockpiles climbed by 4.4 million barrels in the week.  The increased stockpile undermined the bullish outlook from investors in the previous session when prices climbed more than 1% as market participants took the decision of major producers to add supply next month as a sign of confidence that surging COVID-19 cases would not hit demand for long.  Brent crude jumped on Tuesday to $80 a barrel, its highest since November, as OPEC+ agreed to stick with its planned increase for February based on indications that the Omicron variant would only have a mild impact on demand.  Meanwhile, US West Texas Intermediate WTI crude rose 0.6% to $76.50 a barrel. 

Oil prices steadied on Wednesday as investors assessed the impact of a massive increase in COVID-19 cases however, upside demand remained limited after US fuel inventories climbed.  Brent crude futures fell 0.03% to $80.04 a barrel, while US West Texas Intermediate crude futures rose 0.03% to $77.01 a barrel.  The US reported nearly 1 million new coronavirus infections on Monday, the highest daily number in the world and nearly double the previous US peak set a week ago.

Oil prices rose about 2% on Thursday extending their new year rally amid the escalating unrest in OPEC + producer Kazakhstan and supply outages in Libya. 

Market Wrap

On Monday Apple Inc became the first company to hit a $3 trillion stock market value, prior to end of day, as investors placed bets that the iPhone maker will keep launching best -selling products as it explores new markets such as automated cars and virtual reality.  Apple shared the $2 trillion market value in line with Microsoft Corp (now worth about $2.5 trillion), Alphabet Inc, Amazon.com Inc and Tesla which have market values above $1 trillion.  US stock indexes climbed higher on Monday, looking to extend a market recovery from the shocks of the pandemic into the new year.  Shares in heavyweight Tesla jumped after the electric carmaker posted good delivery numbers.  The stock climbed 9% boosting the S&P 500 and the NASDAQ, followed by Apple and Nvidia.  The banking sector added 2.7% with Goldman Sachs, JP Morgan, Morgan Stanley and Wells Fargo gaining 41.8% to 4.6%, tracking a jump in US Treasury yields as investors expected a series of US interest rate hikes this year.  Shares of oil majors Chevron Corp and Exxon Mobil Corp gained more than 1% each as crude price rose on tight supply and hopes of a further demand recovery in 2022.  The S&P 500 energy index was the top sectoral performer in 2021 with a 47.7% rise, its biggest yearly gain ever.  Meanwhile the benchmark S&P 500 added 27% in 2021 whilst the Dow added 18.7% for the year and the tech-heavy NASDAQ gained 21.4%.  Impacting the market were Pfizer and BioNTech as they dropped by 3.2% and 5.6% even as the US Food and Drug Administration authorised a third dose of their COVID-19 vaccine for children aged between 12 and 15 years.  Overall, the healthcare index was down 1.4%.  Meanwhile, London’s traders were enjoying their final day of festive holiday, while Europe had a good start with the STOXX 600 index reaching up a record high after some encouraging data from the eurozone and eastern Europe. 

Tuesday saw European stocks continuing with their new year rally led by economy-sensitive travel, banking and commodity stocks on fresh signs that the Omicron variant is less severe than actually was feared in the beginning.  The pan European STOXX 600 index rose 0.6% to 493.1 hitting a record high after Wall Street’s S&P 500 and the Dow Jones closed at all-time highs overnight.  Europe’s travel and leisure index jumped 3.3% to its highest in more than six weeks.  London’s FTSE 100 gained 1.3% catching up with a global rally as trade restarted after a long holiday weekend. 

Thursday saw the Bitcoin dropping below $43,000 testing multi-month lows after the release of minutes from the FED Reserve Meeting.  A break below last month’s trough of $42,000 would make it the weakest since September.  Share markets in Asia were on selling mode on Thursday as well, while US Treasury yields edged higher.  The S&P ended a volatile session close to unchanged on Thursday, as technology shares fell but financials were of support a day after the market sold off. 

The S&P 500 financials index rose 1.6% extending this week strong gains while economically sensitive sectors also advanced.  Energy (.SPNY) gained 2.3% and is up more than 9% since 31 December.  Banks were among top performers amongst financials, with the S&P bank index up 2.6% following the rise in the benchmark US 10-year Treasury yield, which touched its highest level since April 2021.  The S&P 500 closed at 4696.05 lower by 0.1%.  The Dow Jones ended lower by 0.5% closed at 36,236.47, while the NASDAQ 100 closed lower by 0.04% to reach 15,765.36.   In Europe, the CAC 40 dropped by 1.718% to close at 7249.66, while the DAX closed lower by 1.35% to close at 16,052.03. 

Currency Roundup

Euro

On Monday in the currency markets the eurozone data failed to lift the euro as focus remained on how much further the dollar will rise if the FED raises US interest rates a number of times this year as is currently expected.  On the same day euro slipping by 0.21% to $1.1345, while Germany’s 10- year benchmark yield briefly jumped about four basis points to -0.138% to its highest level since November.  On Thursday the euro stood at $1.1305 as it continued to consolidate in the middle of its trading range since mid-November. 

Turkish Lira

Turkey’s lira saw a bumpy start to the year, driving as much as 5% before a partial recovery, as its central bank revealed it had used up more than $3 billion of its reserves last month when the currency slumped to record lows.  Turkey’s statistics agency also reported that annual inflation jumped far more than expected to 36% year-on-year in December, the highest since September 2002.

Sterling

On Monday sterling dipped by 0.05% at $1.3517.  Meanwhile sterling approached its two-year highs against the euro on Tuesday and dropped only slightly against a strengthening dollar, supported by a continued increase in gilt yields.   Sterling on Thursday traded at $1.3526, having retreated overnight from the $1.3599 level, its highest in nearly two months following the FED minutes. 

US Dollar

The dollar moved higher against its major rivals as an upbeat market mood on Monday lifted European equities and government bond yields for the first day of trading in 2022.  However, as London was closed, volume of trading was expected to remain limited.  The dollar index which measures the greenback against major peers, rose 0.12% to 95.79, while the pan-European STOXX 600 hit a new record high and US stock futures pointed to a positive session on Wall Street.  The Dollar jumped against risk sensitive currencies including the Aussie and sterling on Thursday amid worries about faster policy tightening by the Federal Reserve negatively impacted market sentiment.  The dollar also remained close to a five-year high against the yen, supported by a surge in the US Treasury yields on rising bets for a US rate hike in March.  The US dollar index that measures the currency against six major peers edged up 0.08% to 96.259 after rebounding on Wednesday from intraday losses as steep as 0.44% following the release of the minutes. Against the Yen, considered a safe-haven currency, the dollar lost 0.2% to 115.87 yen, however, remained not far from Tuesday’s peak at 116.355, its highest level since January, 2017, buoyed by the spike in the US Treasury yields. 

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