For the first time in a while, a threat of COVID restrictions becomes an overriding market theme again. Austria announced a new lockdown, Germany could follow suit. The Swiss franc, dollar, yen led the growth in FX on Friday. At the same time, the yen, traditional safe-haven asset, rallied against USD which added to the case that risk-off was becoming the key driver of market moves again.
Risk assets were under pressure—while still minor—European indices lost about half a percent. Oil prices were pulling back on rising energy consumption risks. Money markets were cutting rates on tightening the ECB's policy in 2022, which was not surprising, because the risks of new restrictions are now primarily concentrated in the Eurozone. Gold was at its highs since June and after the key trendline was broken, it consolidated in a wedge pattern, likely indicating preparations for a new rally targeting next resistance at $1900- $1910.
The strengthening of the dollar this past week proved to be more or less stable, as data on the US economy continued to stand out. Of course, we're talking about the data on retail sales, which significantly exceeded the forecast. In particular, core retail sales jumped 1.7% MoM against the 1.0% forecast. The indicator showed positive growth rates for the third month in a row, pointing to an impulse in consumer spending, which forced investors to think about the growth of inflation risks in the American economy.
The $1.4 trillion fiscal spending package over the next 10 years should have reflationary consequences for the economy, so the dollar was following the news from Congress.
The UK retail sales data also exceeded expectations, but the GBP hardly got any relief from that. Nonetheless, the GBP was holding better than the EUR this week as the chances of a rate hike by the Bank of England increase in December. Excluding fuel, monthly sales growth was 1.6%, exceeding the forecast by as much as 1%.
Given that European countries have not been able to dodge the new wave of COVID despite the high rates of vaccination, the main risk for this situation is an increase in COVID hospitalization rates in the United States. If the country is swept by a new coronavirus wave, a full-fledged risk-off will most likely begin in the markets and it will be possible to forget about policy tightening from major central banks next year.