Tuesday, 5 July 2022
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•          Trading for the new week took a slow start as US markets were closed in observance of the 4th of July holiday. In Europe only second tier data were scheduled for release. Last week’s panic on growth eased, at least temporarily. However, in the new market era, a day of relative calm still allows moves on (European) interest rate markets of 10+ bps. After last week’s sharp setback in yields, markets apparently reached a more neutral positioning. Bund yields rose 10/11 bps across the curve with the very long end slightly outperforming (30-y +7.2 bps). The German 10-y yield (close 1.33%) rebounded off the key 1.15%/1.18 support area (38% retracement March/previous top). Intra-EMU spreads versus German finally ended recent narrowing trend (Greece being the exception). The 10-y Italian spread widened 5 bps. Buba chief Nagel said that the new ECB crisis tool to support bond markets of weaker nations should only be used in ‘exceptional circumstances and under narrowly defined conditions’ This sounds quite different from the ‘whatever-it-takes’ narrative to prevent policy fragmentation as aired by other ECB members of late. European equities initially gained some ground, but in the end gains, if any, were negligible (EuroStoxx50 + 0.12%). Potential headwinds from inflation and growth remain a factor of huge uncertainty going into the earnings season. On FX markets, the dollar stabilized slightly below recent peak levels (DXY close at 105.14). EUR/USD closed modestly higher at 1.0422, but the technical picture remains fragile. Sterling held a tight sideways range near the 0.8620 pivot.
•          This morning, Asian equities and US futures try to see some positives from a video call between US Treasury Secretary Yellen and Chinese Vice premier Liu He. The US is considering to reduce some of the Trump era import tariffs to ease inflation. However, the risk-on momentum isn’t really convincing. China Caixin PMI’s (composite 55.3 from 42.2) also suggest an economic recovery as corona restrictions are scaled back. At the same time, higher yields and rising energy prices (oil and European natural gas) remain persistent challenges for global/regional growth. The dollar trades mixed (DXY 105.10). The yen underperforms on higher core yields & energy prices. USD/JPY regains the 136 handle (136.25). EUR/USD gains a few ticks (1.044). The 50 bps RBA rate hike apparently was fully discounted by the Aussie dollar (cf infra). Later today, the calendar is thin. US factory orders and final EMU PMI’s are probably no market movers. On interest rate markets, we look out whether yesterday’s rebound might be the start of a bottoming out process (in yields). EUR/USD last week avoided a real test of the 1.0350/41 key support area. Still the picture remains fragile as long as the pair fails to regain the 1.0615 level. This still looks quite far. The BoE today will publish its financial stability report. It probably won’t contain much positive news for sterling. For now, EUR/GBP trading is still guided by a gradually but protracted buy-on-dips pattern.

News Headlines

•          The Reserve Bank of Australia conducted a back-to-back 50 bps rate hike this morning, lifting the policy rate from 0.85% to 1.35%. Inflation is forecast to peak later this year and return towards the 2%-3% target range next year. Medium-term inflation expectations remain well anchored and the RBA stresses the importance that this remains the case. Resilient economic growth and a tight labour market (including wage growth) add to the case that current still extraordinary monetary support is no longer needed. The RBA sticks with its forward guidance that further rate hikes will be coming with the size and timing data dependent. The RBA specifically mentions the Q2 CPI print (July 27) as key input for the inflation outlook. The household spending serves as an economic risk. The Aussie dollar is virtually unchanged (AUD/USD 0.6875) following June underperformance (correction commodities & stronger dollar). Australian swap rates are stable as well. Money markets discount a 3%+ policy rate by the end of the year.

•          European gas prices yesterday rose by 10% as a strike at Norwegian gas fields over a wage dispute started overnight. An additional 191 members would join the strike from July 9 if no solution is found. Gas production is set to fall by 292k barrels of oil-equivalent/day with about 13% of Norway’s daily gas exports falling away.


he ECB finally turned the corner in its inflation narrative. The central bank ended net asset purchases, facilitating rate hikes from this month. Real yields took over from inflation expectations, pushing the German 10-yr yield to its highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower. 1.18%/1.15% serves as an important support.

The Fed started tightening and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hike in July is likely. Quantitative tightening will hit max speed by September. Anticipation on even faster Fed tightening pushed the 10-y yield to a new multi-year high of 3.5%. Short-term correction is in store with 2.72% marking a firm bottom.

EUR/USD tested the 2017 low at 1.0341 which survived. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. However, the 1.0806 resistance still proved one step too far, even as the ECB formally announced to start hiking rates as inflation stays unacceptably high. Range-trading ahead.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. The BoE in June signaled it might step up tightening, but it is unsure whether this will change fortunes for sterling. EUR/GBP 0.8721 is next resistance

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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