Tuesday, 8 February 2022
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Markets

•          In a session with few important  data, the bond market sell-off slowed yesterday. However, the yield upleg triggered last week as ECB’s Chair Lagarde opened the door for a policy reassessment in March and a subsequent strong US payrolls report remained firmly in place. This isn’t a correction yet. Except for a limited setback at the short end of the (European) yield curve, US and European yields stabilized, at best. The decline in short-term (EMU) yields occurred as ECB’s Lagarde before the European Parliament indicated that an ECB policy adjustment will be gradual as the ECB will carefully assess the implications of incoming data for the medium term outlook. The German yield curve steepened with the 2-year yield declining 3.9 bps while the 10 & 30 y still rose a further 2.3/3.8 bps. Intra-EMU spreads versus Germany also continue their widening tends as investors ponder the potential impact of higher core yields and the ECB reducing APP bond buying sooner than expected. Moves in US yields were limited between -2 bps (2-y) and +0.7 bps for 10y & 30y. European and US equities showed a slightly different picture. The EuroStoxx50 closed with gains of 0.83%. US indices failed to maintain limited opening gains with Nasdaq again losing 0.58%. On the FX market, the euro lost some of its post-ECB momentum. The 1.1483 resistance apparently is a too high hurdle for now. The pair closed marginally lower at 1.1442. At the same time, the TW dollar (DXY) also showed no clear trend (close 95.40 from 95.49). The yen slightly outperformed (USD/JPY close 115.10). The pause in the broader euro rebound was also visible in EUR/GBP (close 0.8453).

•          This morning, Asian markets show a mixed picture with China underperforming. Japanese and Australian markets are trading in positive territory even as local bond markets are ever more affected by the global interest rate repositioning. At 0.21%, the Japanese 10-y yield is touching highest levels since 2016 and reaching top of the preferred range of the BoJ (0.0% +/- 25 bps). The Australian 10-y yield this morning also tested the cycle top near 2.12/13% as markets prepare for RBA interest rate normalization later this year. For now, gains of the Aussie dollar are limited (AUD/USD 0.7125). Later today, the eco calendar is again only modestly interesting. US NFIB small business confidence and trade balance data are no market movers. Speeches from ECB’s de Cos and Villeroy might give some insight on how the debate on inflation and policy evolves within the ECB. Despite yesterday’s comments from ECB ‘s Lagarde on a gradually policy, established bond market trends remain firmly in place. The US 10-y  yield (1.945%) is nearing the 2.0% barrier. We look out for investor interest as the US treasury today sells 3-year bonds. On FX markets, the post-ECB euro repositioning is taking a breather after the rejected test of 1.1483. We assume that the downside in the single currency has become better protected. EUR/USD drifting back below the 1.1386/1.1335 area (previous range top/uptrend line) would be disappointing for euro bulls. In a similar move as EUR/USD, EUR/GBP is easing off the 0.8475 area with first support near 0.8423.

News Headlines

•          The US and Japan agreed to remove Trump-era steel tariffs that were in place since 2018. The 25% American levy on Japanese steel will be suspended up to 1.25 million metric tons per year from April 1 on. Japan is the fifth-largest metal exporter to the US. In 2017, the year before the tariffs were put in place, the US imported 1.7 million metric tons before falling to 1.1m tons by 2019. The agreement follows a similar deal between the US and the EU in October.

•          Poland’s finance minister Koscinski resigned over flaws in the country’s tax system overhaul, dubbed the Polish New Deal, that took effect at the beginning of this year. The spending pledges and tax changes were meant to benefit the lower and middle earners but instead left some with lower salaries in January. Stopgap measures to sort out the issue only created more confusion. PM Morawiecki would take over Koscinski’s responsibilities until a replacement is chosen. The plan also draws criticism for potentially spurring inflation at a time it is already running at a two-decade high (8.6% in December). Poland’s central bank (NBP) started raising rates in October last year in a response, bringing it from 0.10% to 2.25%. The NBP is expected to hike again later today with a minimum of 50 bps.

Graphs

Long term EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected (Q4 2022) amid stubbornly high and even accelerating inflation. The move was driven by higher real rates. The break into positive territory has been confirmed. The German 10-y yield also cleared the 0.15% resistance (61.8% 2018-2020 retracement), with 0.40% as next reference .

The US 10-yr yield took out the October top at 1.7%. The psychological 2% mark is next resistance. The Fed’s hawkish policy turn triggered a surge in real yields. A March rate hike and June start of balance sheet reduction become the most likely scenarios. Core bonds and stocks to sell-off in lockstep again?

The ECB changed the tone dramatically. Views on temporary inflation have changed. This will be formally reflected in the March projections. Net bond buying is poised to end sooner, at the latest in Q3, allowing for a first rate hike later this year. EUR/USD left the lows behind with backing from the central bank. Previous resistance around 1.14 turned into support with the next reference at 1.1483 and 1.1524.

The BoE hiked to 0.5% in February with the biggest possible minority even voting for a 50 bps increase. Further tightening is in the pipeline. With quite some BoE rate hikes already discounted and the ECB having started the U-turn, the odds have turned in favour of EUR/GBP. The pair tested the 0.828 support area but rebounded quickly. The 0.85 big figure is both technically and symbolically important.

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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
It has not been assessed as to whether or not these insights would be suitable for any particular investor.
Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions.
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Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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