Fed warns on "vulnerable" risky assets

• In its latest Financial Stability Report, the Fed noted that risky assets remained vulnerable to significant declines if the economy were to deteriorate and called stablecoins – cryptocurrencies that are fixed to the US dollar – an emerging threat.  The report also warned that the issues in China’s real estate sector could spread to the US.
• Bloomberg reports that Lael Brainard was interviewed for the position of Fed Chair at the White House last week, with President Biden indicating recently that he would make his decision “fairly quickly”. Powell’s term expires in February. Separately, Randal Quarles, vice chair for supervision, announced that he would retire in December giving Biden a total of three additional spots on the Fed Board to fill in the coming months, besides the appointment of the Chair.
• Tensions between the UK and the EU increased yesterday after EU leaders said the entire trade deal between the two parties could be in jeopardy if the UK triggered Article 16 on Northern Ireland. PM Boris Johnson has threatened to suspend parts of the Northern Ireland Protocol using Article 16 of the Brexit agreement.
• The Turkish central bank raised reserve requirement rations for foreign currency deposits by 200bp overnight in a decree published in the Official Gazette.
• There was no major economic data released yesterday, but the market will be looking to the latest ZEW survey in Germany and US PPI data today.

Today’s economic data and events

14:00 Germany ZEW survey

17:30 US PPI (Oct) forecast 0.6% m/m 8.6% y/y

Fixed Income

• Yields on USTs picked up on Monday following the sharp post-FOMC fall seen at the end of last week, likely buoyed by a solid jobs report and progress on passing President Biden’s spending plans. The 10-yr climbed 3bps to 1.4897%, while at the shorter end of the curve the 2-yr added 4bps to 0.4426%.
• Yields on UK gilts also picked up yesterday, following their own sharp drop last week in the wake of the Bank of England meeting, where markets were wrongfooted by the 7-2 vote to keep rates on hold. After falling 22bps across Thursday and Friday, the 10-yr added 1bps yesterday to 0.856%, while the 2-yr added 1bps to 0.417%, compared to 0.408% on Friday but 0.704% prior to the meeting.

FX

• The dollar lost some ground at the start of the week, with the DXY dropping -0.3% to 94.049. In trading this morning it is down just modestly, at -0.01%.
• Commodity currencies outperformed yesterday, with the AUD adding 0.3% to 0.7423 and the NZD 0.7% to 0.7167 as pandemic-related restrictions eased in New Zealand, although the CAD lost -0.1% against the greenback.
• Sterling rose 0.5% against the dollar yesterday, erasing some of the losses seen the previous week after the Bank of England surprised markets with its dovish stance. Cable closed at 1.3563 yesterday.

Equities

• There was another round of record closes for the major US equity indices, with the NASDAQ, the S&P 500 and the Dow Jones all hitting record highs. The Dow Jones added 0.3% with the other two adding a more muted 0.1%, but the risk-on sentiment in equity markets of the past week shows no signs of abating as yet.
• Within the region, the ADX was the major gainer yesterday, adding a further 1.2% to take the index up 62.2% ytd. The DFM added 0.2% yesterday and the Tadawul closed almost flat, up 0.04%. In Egypt, the EGX 30 lost -0.5% by the close.
• There was little movement of note in European equity markets yesterday. The CAC added 0.1%, while the FTSE 100 and the DAX both lost -0.1%.

Commodities

• Oil moved higher yesterday, with both benchmarks adding 0.8% at the close. WTI ended the day at USD 81.9/USD, while Brent closed at USD 83.4/USD. Both benchmarks are up a further 0.1% in early trading this morning.
• Markets are waiting for any concrete signals from President Biden and President Putin with regards tapping the Strategic Petroleum Reserve in the US, or boosting gas supplies to Europe respectively. President Putin had pledged to boost gas flows from Monday but there is no sign of that as yet, while in the US President Biden is expected to make an announcement this week with regards the SPR.

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