of the week ahead


Matt Jones

Welcome to "The Long & Short of the Week Ahead", a production of Eurizon SLJ Capital that takes a look at the macro-economic themes of the week ahead and has been recorded for professional investors.

My name is Matt Jones, Head of Distribution for Eurizon SLJ Capital, and I'm joined by Neil Staines, Senior Portfolio Manager.

Welcome back, Neil. Great to have you here with us again.

So as we look at the week ahead and judging on the activities and news flow from last week, it's probably fair to say that a lot of what we're going to be looking at is is framed by the the new COVID variant, although Nu not as in the Greek letter, but Omicron as it's been called. How do you see this impacting markets over the course of the next week?

Neil Staines

Thanks very much, Matt. You know, I think there are a number of key events and themes to focus on next week, many of which will certainly be framed by the news flow surrounding the new COVID variant, specifically with respect to spread in South Africa over the weekend. That data will be very closely watched. As far as cases and particular hospitalisations, with respect to the severity, so far the dominant narrative has been of relatively mild symptoms, but that will be watched closely, particularly in relation to juveniles or young children. There's certainly some potential uncertainty there, but bad news on that front is likely to bring a more severe government fiscal response. And finally, with respect to the vaccine and therapeutic efficacy, signs on both fronts have been relatively positive and we remain in the glass half full camp.

Now, from a market perspective, the key focus is on understanding how the new variant impacts the central bank reaction function. As we discussed in this week's blog, it's even more interesting in combination with the recent post re-nomination Powell hawkish pivot. We retain the view that the Fed remains behind the curve and that the market is behind the Fed, particularly if you take the view that Omicron is a further inflationary development. Simply put, the Fed, while debating an expedited taper, are still easing, albeit a potentially increasingly diminished pace. However, with inflation running hot unemployment falling sharply towards target, it remains our view that the Fed remains significantly behind the curve. Markets so far are only really pricing a return to pre-COVID rate levels in the US by the end of 2023, and we see risk premia in the belly of the curve certainly warranted from here going forwards. Friday's CPI print for November will certainly focus market's attention in this regard.

Secondly, we also get more European sentiment data. I think that's going to be important Centex investor confidence for December on Monday and German ZEW data for December on Tuesday, there will be a key interest. Now, Europe is currently facing a more acute COVID wave and an inflation dynamic that is driven largely or more so by supply side factors to a greater degree than demand factors, unlike the U.S., where we see significant excess demand. Now this is an awkward combination for the ECB. This continues to push back against the prospect of rate hikes in 2022 however small, and it's worth noting the ECB rates are still or even already, depending on your perspective at pre-COVID levels. This awkwardness is made worse by the fact that the divergence within the region is growing in terms of inflation and growth, and in terms of debt dynamics between eurozone member states, all of which make decisions of the governing council at the December meeting very interesting. The German end of the spectrum may soon demand some monetary tightening or an inflation reprieve, if you will. However, this is likely or this likely comes about through the removal of support for peripheral bond markets and against the backdrop of wider credit differentials and wider growth differentials. This really is a complicated backdrop for the ECB.

Thirdly, if US loose fiscal policy and tighter monetary policy argues in favour of a stronger dollar, as we would certainly argue and European monetary constraints damp European, the euro potential, then sterling is likely somewhere in the middle. Next week, we get UK monthly GDP for October. There will be an important figure to watch. And Bank of England Inflation Attitude Survey. These are both key to the rate hike debate in the UK. Now we retain the view that the Bank of England left office in February on the basis that the unemployment rate growth the COVID situation are all unlikely to be clear in December, and the Bank of England is likely to await new quarterly forecasts in February. The Omicron variant is likely to increase uncertainty in the short term and therefore reinforce this view. Rate hikes, albeit modest and almost certainly less than is priced in by the market currently, they will come from the Bank of England, but with some fiscal tightening next year. Notwithstanding the Omicron impact. This likely leaves the near-term growth relatively pedestrian in the UK. despite some encouraging global capital flows and investment. So sterling likely remains heavy certainly versus the dollar, at least in the near term as a slightly less favourable fiscal and growth dynamic weighs out.

Matt Jones

Thank you, Neil. Yeah, certainly a lot to be watching out for in the week ahead. In the meantime, with the weekend separating us and a return to work, what have you got your eye on over the weekend?

Neil Staines

Absolutely, yeah. It's another fascinating weekend of sport. Of course, the build up to the Ashes, some of the warm up games in Australia from England. The excitement is really building there. And live from the Barbican Centre in York, we have the UK Snooker Championships, part of the trifecta of World Snooker. On the football front the Premiership is back again after the midweek games with West Ham v Chelsea and Manchester United v Crystal Palace for me, the big games of the weekend. But ultimately the big event has to be the Formula One back for the penultimate GP of this incredible season. A win for Lewis would take it right down to the wire and we said it before, but this really is a movie in the making. You know, a heated rivalry crashes a pandemic, just thrown a couple of dinosaurs and zombies, and I'm sure you'd have a, you know, a box office smash. The action comes from Saudi Arabia this weekend and will take place against the backdrop of the sad loss of legendary Sir Frank Williams.

Matt Jones

Absolutely. Well, thank you once again, Neil, for joining us and outlining your thoughts in the week ahead. We look forward to catching up with you again next week.

Neil Staines

It's been a pleasure. Thanks, Matt.

Matt Jones

Thank you for joining us for "The Long and Short of the Week Ahead". Further insights are available on our website eurizonsljcapital.com/insights. We look forward to you joining us again next week for more insights into macro-economic events and "The Long and Short of the Week Ahead".


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