BMO's Markets Wrap

According to Bank of Montreal in its morning note of this Tuesday, markets seem to be putting their early Omicron fears aside for now on hope that, even if the variant is more contagious and more evasive of vaccines, perhaps it is less dangerous as well. It is still too early to judge. But, that's the prevailing view from the top in the U.S., and markets were running with it. Equity futures point to another higher open this morning to the tune of about 1.3% for the S&P 500. Oil prices were moving up again as well, with WTI trading in the US$71.50 range, which is giving the CAD a lift. Treasury yields were little changed, with the 10-year sitting at 1.44% this morning, while 2s were little changed as well. BMO noted that the 10s-2s curve continued to flatten over the past week alongside a more hawkish Fed and Omicron concerns, with the spread (roughly 78 bps) down to levels seen at the start of the year (it had steepened to almost 160 bps by late-March).

In Canada data, the goods trade surplus (due at 8:30 am) likely widened in October, to $2.5 bln from $1.9 bln in September. In the U.S., the final read on Q3 productivity is out at 8:30 am.

Overseas, BMO noted, the Reserve Bank of Australia stuck to its path, keeping the cash rate at 0.10% and buying A$4 billion of bonds per week until mid-February. The tone was optimistic, as it discussed how the economy was "recovering" and that there was a "strong recovery in the labour market". It briefly acknowledged the Omicron variant but in the meantime, will consider what the other central banks are up to, how the domestic bond market is holding up, and what sort of progress is being made towards its full employment goal, as well as inflation. And until inflation is firmly between that 2%-to-3% range, it won't raise rates. "This is likely to take some time and the Board is prepared to be patient." And here is the interesting part. No dates were mentioned: not 2023 or 2024. The AUD rallied and was sitting at its highs of the day of $0.71.

Meantime, China released its November trade data, and they were mixed. The trade surplus narrowed to a below-expected $71.7 bln and while the 22% y/y gain in exports was sizable, it was down from October's 27.1% y/y surge. Imports, however, beat expectations, jumping 31.7% y/y, primarily in energy products. "So far this year," BMO said, "import volumes for commodities such as coal, natural gas and copper are higher...areas that have been in short supply. So on the surface, the latest trade report was decent, but it failed to provide reassurance about economic growth, or domestic demand." Then, BMO added, there is the ongoing uncertainty about the property sector (reports overnight that some Evergrande bondholders were not paid and S&P warned that a default "looks inevitable") and the "shaky" relationship with other countries. Latest: tensions between the U.S. and China are sure to grow after the U.S. announced it would boycott the Beijing Olympics. Meantime, some relief from the trade data and yesterday's RRR cut are boosting the CNY. The currency strengthened to below 6.37 this morning (or 6.3681).

Meantime, the EUR continued to weaken to session lows of 1.126 this morning, even with a jump in German industrial production that more than doubled expectations. Production rose 2.8% in October, and September's 1.1% decline was cut to just -0.5%. This is the first increase since July, supported by a jump in manufacturing and mining, and construction. BMO said: "While this is a welcomed move, output remains 0.6% below year-ago levels, or 1.4% for manufacturing alone. There is little sign of an easing on the supply front and that is making investors nervous." The ZEW Survey of investor expectations slipped 1.8 pts in December to 29.9, although not enough to erase November's rebound. But, BMO said, the view of the current situation is "more dire" with that series plunging 19.9 pts to -7.4, back in negative territory for the first time since the summer. Indeed, the incoming government, made up of the Social Democrats, Greens and Free Democrats, has work to do. BMO added, noting Olaf Scholz is expected to assume the role of Chancellor tomorrow.

Still, global markets were trading higher this morning. Europe was up about as much as 2.5% (CAC 40), while the FTSE 100's 1.2% rally was lagging. Asia was also broadly higher, led by a 2.7% gain in the Hang Seng. The USD index was slightly lower, with the majors split in half in terms of winners and losers so far today. Topping the list of winners were the AUD and the loonie; at the bottom, were the DKK and the EUR.