Daily Market Comment – Euro gets some relief, stocks rip higher

Feb 1, 2022 at 9:52 am GMT- Marios Hadjikyriacos

• Euro bounces back as markets price in more ECB tightening
• Stock markets power higher, has the storm passed?  
• Aussie unscathed by RBA, earnings season continues 

Euro recovers

Market participants are raising their bets that the European Central Bank will hike interest rates this year. A quarter-point rate increase has been fully baked into money markets after data showed that German inflationary pressures are not cooling, despite recent covid restrictions and fading effects from an increase in sales taxes last year. 

A similar message was echoed in the latest Eurozone PMI business surveys, which signaled that inflation remains scorching hot as rising wages and energy costs eclipsed the improvement in supply chains. The spike in wages is particularly important as it suggests ‘organic’ inflationary pressures are finally building up, although the ECB will want to see some hard data before it is convinced a paradigm shift is underway. 

All this elevates the importance of the ECB meeting on Thursday. President Lagarde will have to walk a tightrope, highlighting signs that inflation might not be so transitory while also warning that it’s premature to discuss rate increases. The euro staged a powerful rebound yesterday but with market pricing around the ECB already so generous, it will be difficult to extend those gains. 

Equities snap back

Wall Street staged a tremendous comeback at the end of a chaotic month, with the tech-heavy Nasdaq ripping higher by 3.4% as traders bought back their favorite shares at a discount. There was no obvious catalyst behind this turnaround, although some remarks by Fed officials downplaying a ‘double’ rate hike in March may have helped. 

Now the question is whether the storm has really passed or whether this is just a reprieve before the next stomping. Admittedly, it’s difficult to be overly pessimistic at this stage. While trading conditions could remain volatile thanks to fading monetary and fiscal stimulus, the excesses have been washed out of the most frothy parts of the market while corporate and economic fundamentals remain in good shape. 

The Fed also seems ‘fairly priced’ here with five rate increases baked in for the year, and if anything, some of those bets could be unwound in the coming months if investors sense that inflation has peaked. Everything depends on someone’s investment horizon here - there is no telling what the market will do in the next few months but all this volatility could ultimately be a gift for long term investors.

RBA disappoints, earnings barrage eyed 

In Australia, the Reserve Bank ended its asset purchase programme earlier today, albeit with a warning that this move does not imply rate increases are imminent. Policymakers highlighted the modest wage growth in the economy and stressed they will be “patient” until that changes. 

The aussie initially took a hit but quickly recouped its losses to trade higher. Markets are still pricing in five rate increases by the RBA this year, essentially betting the central bank will be forced to change tune soon. While that may happen, it would take an economic miracle for the RBA to deliver all five hikes, which leaves plenty of room for disappointment in the aussie.

As for today, job openings data and the ISM manufacturing survey from the US will top the economic calendar. Finally, there is a storm of earnings releases coming up from big players such as Google, ExxonMobil, Paypal, and AMD. 

The general theme throughout this earnings season has been that this is an unforgiving market. Companies that beat analyst estimates find it difficult to stage impressive rallies, while those that disappoint suffer heavy punishment.