Wednesday, 6 July 2022
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•          The relative calm that (temporary) returned to markets on Monday didn’t last long. A bit strange, yesterday’s huge market swings weren’t triggered by US investors returning from the 4th of July holiday. It was mainly European recession panic and started during the European morning session. Also different from previous sharp market moves, not only interest rate markets and equities tumbled, but this time the euro was also hit hard. EUR/USD breaking below the 1.0341 2017 low highlighted investor panic on an upcoming European recession. EUR/USD finally closed the day at 1.027. The break is clear, opening the way for a return to parity or maybe even worse. EUR/CHF also returned below parity (close 0.9945). Stop-loss EUR/JPY selling reinforced the price action in other euro cross rates. The pair decisively dropped below the 140 handle (close 139.45). Keep a close eye at the 137.85 mid-June low. A break below this level could be sign of more trouble to come for the single currency. In Central Europe, the zloty and especially the forint (new historic low at EUR/HUF 409.6) were hit hard by the regional sell-off. Aside for obvious evident euro weakness, the dollar was the preferred safe haven with DXY fiercely jumping beyond the 105.78 mid-June top (close 105.53). The yen is holding at historically weak levels. At the same time USD/JPY only gained marginally yesterday. Are we reaching the point where there is again a bigger role to play for the yen as safe haven? Recessions fears also triggered a new sharp repositioning on interest rate markets. European yields at first only followed the decline of the euro at a distance. However, a sharp setback in the oil prices (annex decline in inflation expectations; brent oil tumbled from $112/b to close near 103) later in US dealings finally also reinforced the bid for core, in particular, European bonds. German yields declined between 18.6 bps (2-y) and 14 bps (30-y). The 10-y yield closed at the 1.18%/1.16% support area. US Treasuries underperformed Bunds in a bull flattening move with yields ceding between 1.4 bps (2-y) and 6/7 bps points for longer maturities. Recession fears also pushed the Eurorstoxx 50 below the key 3400 support. US equities fared better and to some extent even profited from the decline in yields. The Nasdaq reversed intraday losses to close at +1.75%. Moves in the S&P (+0.16%) and Dow (-0.42%) were more modest. 

•          Sentiment on Asian markets clearly remains risk-off with regional indices ceding between 0.5% and 2.0%+. The dollar is holding its gains (DXY 106.6). Oil keeps its losses (Brent $ 103.25). Investor fears on a (primarily European) recession probably will continue to dominate trading. German orders and EMU retail sales probably are too outdated to play a role in this debate. Even with the focus on Europe, also keep a close eye at the US Services ISM. A weaker than expected figure might only add to global investor discomfort. Later, the Minutes of the June FOMC meeting could flip markets’ attention back to the inflation topic. On the bond markets, we look out for the 1.15/1.18% support for German 10-y yield. A similar reference for the US 10-y yield comes in at 2.70%. Even in case recession fears persist, we are not convinced that a break below these levels will go at the same speed as was the case yesterday. On FX, the combination of USD strength and euro weakness probably will continue after yesterday’s break below 1.0341. Even a poor US ISM probably won’t save the single currency (EUR/USD).

News Headlines

•          UK Chancellor Sunak and health secretary Javid yesterday evening both resigned from UK PM Johnson’s cabinet in a likely coordinated move. A number of junior government members quit as well, significantly weakening the PM’s position in what could be the start of some kind of end game. Both no longer want the associated with Johnson’s values, mainly when it comes to his disregard of ethics and integrity for the top job. Last week’s deceit over the promotion of the deputy whip merely was the straw that broke the camel’s back. Sunak’s resignation letter also pointed at completely different views on economic policy. Sunak believes in the hard medicine while Johnson is more in favour of tax cuts and delays of tax increases to ease the economic pain induced by inflation. Sunak argues that delaying those measures would only ignite inflation. Sterling didn’t really react to the political crisis in yesterday’s tough and volatile market climate.


The 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. First important support at 1.18%/1.15% is under test as recession fears mount.

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 in May and June. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. EUR/USD 1.0806 resistance proved one step too far, even as the ECB formally announced to start hiking rates. Growing recession fears, finally hammered EUR/USD below 1.0341, opening the way for a return to parity (or lower?).

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

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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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