Wednesday, 7 December 2022
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Markets

•          US stock markets lost more dash yesterday, ceding again up to 2% (Nasdaq) in the close and completely erasing the exaggerated reaction to last week’s dovish interpreted Fed Chair Powell speech. Technically, the S&P 500 failed to really test the September high at 4119, with first support in the 3905/3912 area now very nearby. A break lower would end the upleg in this year’s downward trend which started mid-October. Whereas stocks and bonds sold off in lockstep earlier this week, this wasn’t the case yesterday. Traditional risk dynamics were at play with risk aversion helping core bonds a hand. On top, oil prices remain in tail spin, with Brent crude crashing almost over $10/b in two sessions to the lowest levels since early January (<$80/b). Near empty eco calendars, barely any central bank talk (black periods ahead of next week’s final policy meetings) and end-of-year conditions keep investors side-lined for a second session straight. Traded volumes in US Treasuries were very low. Daily changes on the US yield curve ranged between -2 bps (2-yr) and -4.3 bps (30-yr). The US 10-yr yield holds above the previous (June) cycle high at 3.5% which serves as support together with 3.42% (50% retracement on August/October leap higher). German yields shed 5 bps (30-yr) to 8 bps (10-yr). The German 10-yr yield for now holds above the October low at 1.77% with similar 50% retracement on the Aug/Oct move higher further away at 1.61%. The trade-weighted dollar closed higher on a daily basis, but it might have been somewhat more given the risk setting. DXY ended at 105.58 from 105.16, but gently makes more headway this morning. At least two additional big figures are necessary to really call-off the downside alert. EUR/USD closed at 1.0467 from an open at 1.0491 and slides towards 1.0450 this morning. USD/JPY strange enough kept its upward bias as well, changing hands around 137.75 this morning. EUR/GBP in technical trading slowly gets further away from key support at 0.8559/67 without real news.
 
•          The looser-Covid policy rally on Chinese stock markets fades out this morning as trade data serve as a rude awakening. The trade surplus fell more than expected as the global growth slowdown bites into exports (-8.7% Y/Y)  while the strict Covid policy dampens domestic demand. Imports fell by 10.6% Y/Y. Today’s eco calendar remains empty on both sides of the Atlantic with the Bank of Canada policy rate decision the key event. Markets and economists are split between a 25 bps and a 50 bps rate hike (bringing the key rate to 4% or 4.25%), but are eager to hear about the BoC’s future guidance. Governor Macklem has been amongst the most aggressive ones amongst big central banks when it comes to inflation fighting. Sticking with a tightening bias, like the RBA earlier this week, would add to our feeling that global rate markets are too complacent about central bank intentions for 2023.

News Headlines

•          After three consecutive steps of 50 bps, the Reserve Bank of India today raised its policy rate by 35 bps, bringing it to 6.25% (5-1 majority). The move was expected by the majority of analysts. The MPC also decided (4-2 majority) to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. The MPC was of the view that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects. The RBI lowered its growth forecast for the financial year 2022-23 to 6.8% from 7.0%. The forecast for inflation remains unchanged at 6.7%. The 5-y Indian bond yield rose about 7 bps to 7.18%. The Indian rupee gained marginally in a first reaction and currently trades near USD/INR 82,55.
 
•          Australian growth slowed to 0.6% Q/Q in Q3 from a 0.9% growth pace in Q2. Y/Y growth printed at 5.9% from 3.2%, but a figure north of 6.0% was expected. Household consumption (1.1% growth, 0.6% contribution) remained the main driver behind growth, but slowed from a 2.1% quarterly growth in Q2. Net exports made a small negative contribution (0.2%). Inventories added slightly positive (0.2%). The savings ratio declined from 8.3% to 6.9% and might be an indication that consumers have less spare capacity to spend as rates are rising while inflation remains high. Australian yields showed no clear direction this morning. The Aussie dollar also trades little changed near AUD/USD 0.669.

Graphs

The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 5% early next year and remain above a neutral 2.5% over the policy horizon. A below consensus CPI print strengthened the call to slow down the pace of the tightening cycle, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests more downside potential towards the June top at 3.5%.

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. EUR/USD left the strong downward trend channel since February as the current correction on bond markets caused turnarounds on FX and equity markets as well. Key resistance at 1.0341/50/68 gave away. The next zone is situated at 1.0747/1.0806.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive. EUR/GBP tested key support at 0.8559/67 , but the level held.

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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