Aurelia Butler

Ireland is set to announce it’s dropping most pandemic restrictions on Friday, days after England outlined its own dramatic move to scrap rules forcing people to wear face masks in shops and ending mandatory isolation for positive cases. France is also relaxing curbs even after reporting a record number of cases — almost 470,000 — in one day earlier this week.The various announcements mark a growing sign that the road back to normal, or something resembling it, is well under way in Europe. But they also reflect the fact that omicron appears practically unstoppable, with the EU reporting more than 2.3 million cases on Thursday alone. With omicron symptoms milder than the earlier delta variant and hospitalization rates in check, governments are struggling to justify imposing curbs on people and businesses. Some have already started talking about treating Covid-19 as an endemic, rather than a pandemic, as they move toward “living with the virus” policies.The rollout of vaccines is key to that push. While inoculations haven’t been able to halt omicron infections, studies show they limit the chance of developing severe symptoms. European authorities have repeatedly pointed out that unvaccinated people make up the majority of intensive-care admissions from the virus. In the effort to get as many people vaccinated as possible, Austria is pushing the hardest by making shots mandatory. On Thursday, lawmakers passed a law to enact the policy, which will include fines as high as 3,600 euro ($4,100). In Ireland, government medical advisers proposed ending early closing times for bars and restaurants and dropping the need for vaccine passes to access indoor facilities such as gyms, local media including broadcaster RTE reported. Mask wearing, passes for international travel and self isolation for symptomatic people are likely to be the only rules that will remain in place. France will lift the obligation to work from home at least three days a week, remove a requirement to wear a mask outdoors and scrap attendance limits for sports arenas and cultural venues.Still, some health experts, including the World Health Organization, have warned against complacency, saying the virus could mutate again and people should continue to try to protect themselves from infection. Germany looks likely to stick with its rules, when Chancellor Olaf Scholz meets with state leaders on Monday to discuss the pandemic. Stephan Weil, the premier of the state of Lower Saxony, said the country should stick with its current measures, but doesn’t need stiffer controls despite soaring infections.“We still need protective measures but we don’t need to return to total lockdown as the situation has changed, he said on ARD television on Friday. More

MOSCOW (Reuters) – Russian assets are under pressure as investors worry about the possible extension of U.S. sanctions or new EU measures targeting officials, banks and the energy sector if Moscow attacks Ukraine – a move Russia denies it is planning. The Russian stock market has lost around 20% since hitting record highs in October, the rouble has fallen to a more than eight-month low and yields on Russia’s 10-year benchmark OFZ state bonds spiked to their highest in nearly six years in January.On Friday morning, Russian assets were down again, as the markets await a meeting between U.S. Secretary of State Antony Blinken and Russian Foreign Minister Sergei Lavrov in Geneva later the day. Despite the dangerous geopolitics, Russian officials say economic fundamentals are strong and say the rouble volatility is temporary.How healthy are Russia’s finances and what might authorities do to calm markets?ROUBLE The central bank let the rouble free-float in 2014, after waves of western sanctions followed Russia’s annexation of Crimea from Ukraine, and as it sought to protect gold and foreign exchange reserves.Under a fiscal rule adopted in 2017 to strengthen the National Wealth Fund (NWF) Russia buys foreign currency when oil prices are high and sells when prices go below $44 per barrel, shielding the rouble from oil price swings. In 2020, Russia was selling FX, which helped limit rouble losses amid an oil price slump, the COVID-19 pandemic and geopolitical risks.”As oil and gas prices remain high, we believe that the main factor behind the rouble’s depreciation is geopolitical”, not fundamental macro indicators, Sberbank CIB said. CURRENT ACCOUNT AND CAPITAL OUTFLOWSA historic-high Russian current account surplus of $120.3 billion, equal to 7% of the gross domestic product and driven by high gas prices last year, is rouble-supportive, ING said. Yet net capital outflows widened to $72 billion last year, its highest since 2014 and up from $50.4 billion in 2020. “This keeps the local currency undervalued, making it continuously favourable for the trade balance,” ING added. INFLATIONWhile supportive of budget revenues, a weaker rouble contributes to inflation, which reached 8.62% in annual terms this week, double the central bank’s target and near six-year highs. “Given high volatility on the Russian financial markets in the recent days, (the) possibility of the central bank raising key rate by 100 basis points is increasing,” Alfa Bank said, forecasting the eighth straight hike in February to 9.5%.RESERVES AND BUDGETRussian gold and forex reserves are at an historic-high of over $630 billion, enough to cover 25 months of imports or Russia’s $490 billion total external debt, Renaissance Capital said. Russia run a budget surplus of nearly $7 billion last year, on the back of energy prices and the weak rouble. The NWF’s liquid assets – funds on central bank accounts – reached $113.5 billion, or 7.3% of GDP. “This can be used for budget purposes in the times of stress,” Morgan Stanley (NYSE:MS) said. RUSSIAN OFZ BONDS, STOCK MARKETSForeign investors sold 214 billion roubles’ ($2.8 billion) of OFZ treasury bonds in November-December, with foreigners’ share among OFZ holders shrinking by 1.1 percentage points to 19.5% by year-end.The central bank can not directly buy OFZs from the market under existing laws but the finance ministry has said Russian banks may step in and increase their domestic bond portfolios. U.S. investors account for around a third of foreign OFZ holdings, or less than state VTB, Russia’s second biggest bank, which has nearly 2 trillion roubles of OFZs in its portfolio.The finance ministry cancelled bond auctions this week amid high volatility. It says the strong fiscal position allows it to borrow less. Russia enjoys debt level of 20% to GDP, below an average of 60% in emerging markets. The Russian stock market is 2.4 times cheaper than emerging market peers and nearly 5 times cheaper than the S&P 500, Gazprombank said in a note. It has average dividend yields of 10% and could provide solid returns, with the geopolitical escalation offering attractive prices, Gazprombank said. “But the level of uncertainty is still high,” the bank said. ($1 = 76.7020 roubles) More

LONDON (Reuters) – The Bank of England will press ahead with its tightening cycle next month as red-hot inflation runs well ahead of target and the economic threat from the Omicron coronavirus variant should prove milder than previous mutations, a Reuters poll found.Britain’s central bank became last month the first major rate-setter to increase interest rates since the coronavirus pandemic began, surprising markets and many economists who had expected a delay.The central bank said at the time it had to act, even as the Omicron variant swept Britain, because it saw warning signs in underlying inflation pressures.Inflation, reported on Wednesday at a near 30-year high in December, will peak next quarter before starting to decline in the third quarter and won’t reach the BoE’s 2% target until the second quarter of next year, the poll found, adding pressure on the central bank to act.Median inflation forecasts for this quarter and next jumped to 5.2% and 5.5% in the latest poll, which was released on Friday, from 4.7% and 4.6% in the one released in December.”Inflation has surprised higher, again, and that’s only likely to increase the temptation for Bank of England policymakers to hike rates for a second consecutive meeting this February,” said James Smith at ING. (Graphic, Reuters Poll: UK inflation and interest rate outlook: https://fingfx.thomsonreuters.com/gfx/polling/lgvdwjzalpo/UK%20inflation%20and%20interest%20rate.PNG) Markets are pricing in around an 85% chance of an increase in the BoE’s main interest rate to 0.50% next month.British consumers face the added headache of an estimated 50% increase in energy costs in April alongside an increase in social security contributions.Almost 65% of respondents in the Jan. 17-20 poll expected a 25-basis-point rate increase from 0.25% when the BoE’s Monetary Policy Committee meets on Feb. 3 while the proportion expecting a rise to 0.50% by the end of March was more than 75%.Median forecasts showed the BoE hiking its main interest rate by another 25 basis points in the third quarter – a quarter earlier than predicted last month – but it will then wait until early next year before raising it again, to 1.00%, also earlier than previously expected.When asked how high that rate would go in the current cycle, the median response was 1.50%, still an historically low level. Also priming for action, the Federal Reserve https://www.reuters.com/business/fed-raise-rates-three-times-this-year-tame-unruly-inflation-2022-01-20 will raise interest rates three times this year, another Reuters poll found.OMICRONBritain’s economy surpassed its pre-pandemic size https://www.reuters.com/world/uk/uk-economy-finally-bigger-than-before-pandemic-november-2022-01-14 in November, official data showed last week, although some of that momentum was probably lost as people stayed home ahead of the holiday season to ensure they were healthy for Christmas celebrations.Shopper numbers https://www.reuters.com/business/retail-consumer/uk-shopper-footfall-central-london-drops-30-versus-last-week-2021-12-24 in central London on Christmas Eve were 30.3% lower than on the previous Friday, according to data from Springboard. Economic growth was expected to have slowed to 0.6% this quarter after expanding by 1.0% at the end of 2021, the poll found. It will then grow 0.9% next quarter before slowing to 0.7% and 0.6% in the following two quarters.GDP growth for 2022 was pegged at 4.5%, the median of 66 economists showed, and in 2023 it was put at 2.2%. That follows an expected 7.0% expansion last year. Prime Minister Boris Johnson, who faces growing calls to step down over a series of scandals, took a light touch approach in dealing with Omicron, stopping short of imposing the strict measures during previous waves. On Wednesday he announced the end of most COVID-19 limitations.So when asked what impact the Omicron variant would have on the economy compared to the Delta variant, all but three of 24 respondents to an additional question said it would be milder or much milder. (Graphic, Reuters Poll: UK economic outlook: https://fingfx.thomsonreuters.com/gfx/polling/akpezewxbvr/Omicron.png) “As we head into the spring I imagine confidence will be supported by the fact COVID-19 cases will be somewhat lower and we have an entire economy of people who want to go out and spend money,” said George Buckley at Nomura.”It suggests we will see an increase in consumer spending, particularly services spending, as we stop buying stuff and start buying experiences.”(For other stories from the Reuters global economic poll:) More

Earnings too showcase companies’ wage cost pressures. And finally – politics will complicate the picture with Russia, Ukraine and Italy all in the frame.Here’s your week ahead in markets from Ira Iosebashvili @IraIosebashvili in New York, Kevin Buckland in Tokyo, Dhara Ranasinghe @DharaRanasinghe, Julien Ponthus @JulienReuters and Sujata Rao @reutersSujataR in London. 1/ COUNTDOWN TO LIFTOFFIf markets have it right, the Fed’s Jan.25-26 meeting will be the last one before interest rates lift off. Roughly four rate hikes are priced for this year, starting in March, but the rates outlook aside, markets will listen for what the Fed says about its $8-plus trillion balance sheet.December meeting minutes showed lengthy discussions about reducing bond holdings. Fed Chairman Jerome Powell said the balance sheet could be shrunk faster than in the past.A Reuters poll predicts the Fed to start trimming its balance sheet by end-September, though some reckon it may happen sooner and faster than flagged. Hawkish signals could extend the selloff in Treasuries and tech shares.Meanwhile, the Bank of Canada isn’t waiting around for its neighbour and could commence raising rates on Wednesday. GRAPHIC: FED AND YIELDS, https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwjebzpo/Pasted%20image%201642526443746.png 2/EARNINGS: MIND THE ATLANTIC GAP!Could 2022 could be the year European equities break a six-year run of underperformance against U.S. peers? The old continent is home to an army of cyclical and value (read cheap) stocks like banks, which typically outperform tech in times of monetary tightening. With Wall Street lagging European markets this year, this dynamic seems already at play. The Q4 earnings season offers encouragement to Europe bulls; Refinitiv I/B/E/S data shows earnings surging 49% year-on-year. Luxury groups Richemont and Burberry awed markets with quarterly updates. European profits also appear less threatened by wage inflation, Barclays (LON:BARC) analysts note. U.S. earnings are seen growing 23%, and markets are still coming to terms with Goldman Sachs (NYSE:GS)’ profit miss and hefty cost increases. In coming days, European names LVMH, STMicro and Philips are among those reporting and IBM (NYSE:IBM), Verizon (NYSE:VZ) and Apple (NASDAQ:AAPL) in the U.S.. GRAPHIC: Wages growth, https://fingfx.thomsonreuters.com/gfx/mkt/znpnelgjbvl/Pasted%20image%201642600245725.png GRAPHIC: STOXX vs S&P Earnings Forecasts, https://fingfx.thomsonreuters.com/gfx/mkt/akvezewegpr/earnings%20theme.PNG 3/WANTED: NEW ITALY PRESIDENTItaly needs a new president and the complex process to replace outgoing Sergio Mattarella kicks off Monday, with PM Mario Draghi a frontrunner for the post. It could mean weeks of political instability for Italy. If Draghi gets the job, a new prime minister must be found and the multi-party coalition supporting his government could unravel. The same could happen if the parties fail to agree an alternative candidate. All this just as bond market angst grows about rising inflation and a more aggressive ECB response. Russia’s troop build-up near Ukraine’s border is stoking war fears, meaning geopolitical developments more broadly will continue to grab markets’ attention. GRAPHIC: Italy needs a new president, https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnjejgpq/Italytheme2001.PNG 4/RATES UP DOWN UNDER?The Fed is not the only central bank to have underestimated inflation. Australian CPI data on Tuesday may well force Reserve Bank of Australia Governor Philip Lowe to capitulate on his long-held contention that rate hikes this year are “extremely unlikely.”Money markets have long doubted Lowe’s (NYSE:LOW) scenario, and are pricing a first hike to a quarter percent as soon as May with at least three additional quarter-point increases by year-end.Australia’s jobless rate has plunged to its lowest since 2008 and some economists predict core inflation could jump to its highest since 2009, at 2.5%. At the very least, such a reading should seal an end to pandemic-time bond purchases at the Feb. 1 RBA meeting. GRAPHIC: RBA inflation test, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjobdjepr/Pasted%20image%201642685575045.png 5/SERVICE CHARGES Considering the spread of Omicron, global business activity held up surprisingly well in December, purchasing managers indexes (PMI) showed. But when advance January PMIs emerge on Monday, focus will be on how cost pressures are shaping up.Composite input prices slipped last month as factories’ supply chain delays eased, but U.S. service sector input prices rose to the highest since 2009. In Europe they stayed near November’s record high, and rose in China for the 18th straight month.In countries where services contribute the lion’s share of economic output, soaring costs add more uncertainty to the inflation outlook. GRAPHIC: Input costs, https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwjbyovo/Pasted%20image%201642626686730.png More

Japanese inflation rose 0.5 per cent last month compared to the previous year, increasing at its fastest pace in almost two years for a second consecutive month as rising energy costs added to pressure on households.The government said on Friday that consumer prices grew at the same rate as in November, the largest increase since February 2020 and the fourth consecutive monthly rise. The consumer price index excluded fresh food but covered energy costs, which rose 16.4 per cent.The data were published just days after the Bank of Japan changed its view on inflation risk for the first time since 2014, revising its projection upward from 0.9 per cent to 1.1 per cent for the fiscal year starting in April. The central bank did not change its ultra-loose monetary stance as inflation has remained below its 2 per cent target. But BoJ governor Haruhiko Kuroda told a press conference on Tuesday that the central bank would maintain a “close eye” on whether rising prices had a negative impact on incomes and households’ purchasing power. Rising inflation has become a growing concern globally, with the US, UK and EU all reporting record price increases in recent weeks.But despite mounting concerns about inflationary pressures, analysts believed price constraints in Japan remained much weaker than elsewhere.

“With years of deflation, wages failing to rise and consumers unfamiliar with inflation, they are hypersensitive to rising prices. As supply constraints will ease in the second half of the year, prices in Japan are expected to rise only about 1 per cent for a while,” said Takuji Aida, chief economist at Okasan Securities. Takeshi Yamaguchi, an economist at Morgan Stanley MUFG Securities, said inflation would probably rise to about 2 per cent due to higher oil prices, as more companies pass on the increase in prices of raw materials.“A robust pick-up in inflation expectations and wages will be needed” to stabilise inflation, he said. Kazuma Maeda, an economist at Barclays Securities Japan, said inflation would probably remain below the BoJ’s 2 per cent threshold. “We believe medium- and long-term inflation is unlikely to shift upward unless accompanied by a significant pick-up in inflation expectations and wages,” he said in a note.Maeda added that underlying inflation, excluding energy costs, would continue to lack momentum, hovering at 0.5 to 1 per cent year on year because of structural factors.The CPI for 2021 fell 0.2 per cent as prices started to rise sharply towards the end of the year, marking the second year in a row of decline. More

UK consumer confidence has dropped to its lowest level in 11 months as people worry about surging inflation and fuel bills, suggesting that rising living costs will slow the household spending recovery.The UK consumer confidence index, a closely watched measure of how people view their personal finances and wider economic prospects, fell four points to minus 19 in January, according to research company GfK.This was the lowest reading since February 2021, when the country was in a strict lockdown, and below analysts’ expectations of no change from the previous month. Joe Staton, client strategy director at GfK, said that “despite some good news about the easing of Covid restrictions, consumers are clearly bracing themselves for surging inflation, rising fuel bills and the prospect of interest rate rises”.All the components of the index deteriorated. However, the fall in consumers’ expectations about their personal financial situation for the year ahead and the sharp decline in the proportion of people who think this is a good time to make major purchases were particularly worrying for the pace of the UK recovery because they are more closely linked with personal spending patterns.“The four-point fall in the major purchase index certainly suggests people are ready to tighten their belts,” said Staton.Consumer spending has been a major driver of the UK economic recovery. In the third quarter, household consumption made the largest contribution to economic growth, accounting for 1.2 percentage points of the 1.3 per cent quarter-on-quarter expansion in gross domestic product.The GfK index, based on interviews carried out between January 4 and 12, does not reflect Wednesday’s announcement of the easing of Covid restrictions. But Staton said it was unlikely that the mood would brighten when the health emergency receded “because it’s the cost-of-living squeeze that’s worrying us now and this will affect us for months to come”.On Wednesday, the Office for National Statistics reported that consumer inflation rose at the fastest annual rate in 30 years in December. Economists are forecasting that inflation will peak in April when Ofgem, the energy regulator, will increase its default energy tariff price cap.The GfK data chime with ONS figures published on Thursday which showed that in the first half of January two in three people in the UK reported their cost of living had increased over the previous month. Nearly nine in 10 of those blamed rising food prices and about eight in 10 attributed the squeeze to rising energy bills.Linda Ellett, head of consumer markets, leisure and retail at KPMG UK, said their research suggested that about one-third of consumers would reduce their discretionary spending in 2022 because of rising living costs.“The cost of living squeeze is also causing those who have been able to save during the pandemic to either sit on their savings, use them to offset costs, or to be conservative with how much of it they are willing to spend this year,” she added. More