European stocks surf on softer USD

Markets were quiet yesterday, as the US was closed for Thanksgiving.

European markets mostly surfed on the positive reaction from the US equities to the Federal Reserve (Fed) minutes released a day earlier. The latest minutes from the Fed were heard as dovish, as the Fed is willing to reduce the size of its interest rate hikes.

But, keep in mind that the fact that they will go higher has been widely ignored.

The DAX advanced to a fresh 5-month high, and is now preparing to test the major 61.8% retracement on the year-to-date selloff, which stands around 14590 mark, and if cleared, will hint at a stronger recovery in German stocks despite looming recession worries.

The French CAC40 on the other hand advanced to a fresh 7-month high, and is now up by almost 20% since the dip that we saw end of September.

And the recent rally in the European stocks is mostly due to the euro’s appreciation against the greenback, which also started around the end of September, and which somewhat eased the inflationary pressures for the European companies, along with the falling energy prices.

The same is true for sterling and FTSE. A stronger pound feeds into a better appetite for FTSE these days, even though most FTSE companies’ revenues are US dollar-denominated. The correlation between Cable and the FTSE has been relatively strong this year.

And whether sterling or the euro will recover more against the US dollar, depends heavily on the US dollar, as the greenback has been the major driver of the FX markets over the past year-and-a-half, and the dollar tends to say the last word as long as the Fed remains on its aggressive monetary tightening path.

The latest minutes from the European Central Bank (ECB) released yesterday revealed that ‘a few’ officials favored a smaller rate increase, than the 75bp that the bank delivered last month, citing the other monetary tightening measures that would help restricting the monetary conditions. But ECB’s Isabel Schnabel was there to dissipate speculation that the ECB would opt for a softer rate hike in December, warning that the biggest risk would be ‘underestimating inflation’s persistence’. We will see how much the rest of the committee agrees with that.

Elsewhere, rate hikes continue at a certain speed. The Swedish Riksbank raised its interest rates by 75bp yesterday and said that the monetary tightening will continue to tame inflation in Sweden. The Korean Central Bank raised its interest rates by another 25bp to the highest levels since 2012 and the won gained, whereas the Turkish Central Bank CUT its policy rate by another 150bp points, but said that the easing is perhaps enough at 9%, and that risks on inflation – which stands around 85% officially, and 185% unofficially – increase from here

In China, the central bank signals lower reserve ratios for banks, and conducts reverse repo operations to boost liquidity in the system, as news of fresh Covid restriction measures creep in. The Chinese news certainly prevent oil bulls from jumping in the market right now, and the American crude consolidates below $80bp this morning, with solid offers seen at $82/85 range.

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