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Macro Afternoon

Credit Suisse in the club:

Global markets have traded on a more stable footing this week so far, recovering from the sharp weakness of the past fortnight, when fresh uncertainty around the newly emergedOmicron variant drove a rapid pullback in market sentiment, triggering particularly steep losses in US technology stocks, crude oil and crypto assets. While a portion of these losses has since reversed, the impact of improved risk sentiment in FX has been mixed:oil exporter FX such as CAD and COP have gained ground over the past week, at odds with the uneven picture in EM FX and in pro-cyclical currencies, including underperformers AUD and NZD (seeFigure2). This mixed price action is reflected in the stable price action in the Bloomberg broad USD index, still near 2021 highs (seeFigure3), and in our view reflects the following set of drivers:

1.Benign Omicron news: The news flow surrounding the Omicron variant has been benign since the end of last week, with data from the variant’s epicentre in SouthAfrica showing evidence of mild symptoms and still low hospitalization levels even amid increased transmissibility. Successful antibody treatment test results and cautiously optimistic statements from White House chief medical adviser Fauciyesterday also contributed to the market’s constructive take on the topic. Moreover, the lack of follow through on some of the more aggressive travel restriction proposals advanced last week, with e.g.Japan fully reversing its ban on inbound flight bookings on 3 Dec, also likely added to the market’s buoyance.

2.Strong US data:US data continued to paint a constructive picture of the US economy.The strong tone of the household survey and the steeper than expected decline in the unemployment rate in the Nov US employment report released on 3Dec was viewed in markets as sufficient to offset the below-expectations non-farm payrolls reading. Last week’s decline in jobless claims to 220k, effectively back to pre-pandemic levels, and the surge in the Nov ISM services survey to an all-time high of 69.1 also provided further support to the market’s view that the Fed will announce a faster tapering of asset purchases at next week’s FOMC meeting. The lack of Fed official commentary during the media lockup period has also likely contributed to the market’s steady assessment of near-term FOMC policy risks.

3.No central bank panic: The early read of G10 central banks’ reaction function to the still high level of uncertainty around the Omicron variant has also been cautiously optimistic. Yesterday the RBA stated in its interest rate decision that “The emergence of the Omicron strain is a new source of uncertainty, but it is not expected to derail the recovery”. The bank also upgraded its forward guidance slightly to incorporate expectations that CPIwould sustainably reach the middle of the 2-3% target range “over 2023”, replacing the previous language suggesting that conditions to raise rates were expected to be met by “the end of 2023”. While the board’s insistence on current conditions still not being conducive to an earlier removal of policy stimulus remains an obstacle against a lasting hawkish shift in RBA policy expectations, markets nevertheless took solace in the lack of panic around Omicron uncertainty.

4.PBoC easing: On Dec 6 the PBoC announced it would be cutting the ReserveRequirement Ratio (RRR) by 50bpforall lenders. The significance of this well-telegraphed announcement was perhaps accentuated by the coincident release of details around the debt restructuring terms of a large property developer. While far from being constructive news per se, the latter announcement was likely viewed as somewhat benign to the extent that it reduced uncertainty on the outlook for assets that markets had long deemed distressed. This constructive perception was also reinforced by the removal of language against housing speculation in the PBoC’sstatement, which some in markets viewed as feeding into the tentative rebound in industrial metal prices, most notably iron ore.

The same has not happened in the case of euro area monetary policy expectations, which remain stable, esulting in the 2-year Germany-US yield differential making new 2021 lows yesterday.

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