Monday, 9 May 2022
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•          Last week ended with another joint sell-off in stocks and bonds after solid April payrolls. The report provided the Fed with all the arguments to continue its recently beefed up tightening pace, even as monthly wage growth disappointed marginally. Wall Street shed up to 1.4% (Nasdaq). US bond yields added 2.8 (2y) to 10.6 bps (30y) in a steepening move. European swap yields rose 6.2 bps (2y) to more than 10 bps at the long end. A series of ECB governors (Holzmann on Thursday, Villeroy and Vasle on Friday) flagged the possibility of a rate hike already in June and helped to launch the move. Germany’s 10y yield in particular was eyepopping. An 8.8 bps surge hurled the closely watched reference beyond 1.06% resistance (2015 top) and made it already test the next target at 1.13%. Friday’s yield rise came mainly on the account of real yields, both in the US and the euro zone. Peripheral spreads rose marginally with Greece (+4 bps) underperforming. EUR/USD left intraday lows sub 1.05 behind after the ECB comments. The pair eventually didn’t make it much further compared to opening levels though (1.055). A strong trade-weighted dollar closed near cycle highs at 103.66. Sterling licked wounds inflicted by the openly divided Bank of England. EUR/GBP extended its break above the 0.8512 resistance to 0.855 – the highest since early December.

•          The Asian-Pacific equity scoreboard is all red this morning. Without much other news to trade on, investors have no option but to focus on high inflation, rapid monetary tightening and soaring growth prospects. Losses range between 1 and 4%. Core bonds tried but failed to capitalize on the risk-off. The dollar starts in pole position in FX markets, the Chinese yuan slips on lockdown-impacted trade data (see below). The British pound looks little affected by the historic victory by the Northern Irish Sinn Féin nationalists.

•          Economic data won’t guide markets much today. It does get interesting later this week with US CPI on Wednesday, UK GDP numbers on Thursday and an avalanche of central bank speeches, including from ECB president Lagarde, starting from tomorrow on. For today, there’s quite some nervousness about Russian president Putin’s speech during the May 9 Victory Parade. Risk-off may hold a tight grip, keeping the likes of the euro and sterling in the defensive. EUR/USD 1.05 remains a heavy gravitational force. EUR/GBP very recently swapped a month’s long downward trend channel for a narrow upward sloping one. EUR/GBP 0.8595 is next short-term resistance. Last Friday underscored the bearish momentum in core bonds. We don’t question the trend. The US 10y is testing final intermediate resistance ahead of the 2018 top (3.26%).

News Headlines

•          Chinese lockdowns hampered production and supply/shipments while slowing demand, affecting the country’s exports and imports. Exports in April slowed from 14.7% Y/Y to 3.9% Y/Y. Import growth came to a stand-still (0.0%) after a marginal decline in March. This resulted in a further rise of the Chinese trade surplus from $47.38 to $ 51.12 bln. The trade data confirm the growth risks for the Chinese economy. Chinese Prime Minister Li warned on the grave and complicated employment situation in both cities and, despite the lockdowns, instructed official institutions to giving priority stabilize employment, illustrating the ongoing difficult balancing act in the Covid strategy. The yuan this morning weakens further with USD/CNY jumping north of 6.71.

•          Rating agency Fitch on Friday downwardly revised the Long Term Foreign Currency credit rating of the Czech republic to negative from stable. The rating remains AA-. Fitch mentions substantial downside risks to the growth outlook due to the conflict in Ukraine, weak external demand and supply chain disruptions, high inflation and a tighter monetary policy. The rating agency also mentions high dependance on Russian energy and sees the exogenous shock of the crisis deteriorating public finances. Rating agency Moody’s on Friday upgraded the rating from Ireland from A2 tot A1 with a positive outlook. Moody’s sees the country as well positioned to deal with the fall-out from the crisis in Ukraine. Moody’s indicated that it expects Ireland’s debt ratio to fall below 40% of GDP by 2025.


The ECB will end net asset purchases in June. A first rate hike is likely in July (or even June?!). Runaway/elevated inflation expectations suggest the ECB’s response will still be too little, too late. They have been instrumental to the sharp rise in nominal yields although real yields recently have bottomed too. A break of the 1.13% area paves the way all the way up to 1.63/1.73%.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. Quantitative tightening will start in June and hit max speed from September onwards. The psychologic 3% resistance turned into support. Next stop is 3.26% (2018 top).

EUR/USD remains stuck in a downward trend channel. Losing the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggests a return to the 2017 low at 1.0341. ECB needs to step up its inflation response to give the single currency much needed backing. Russian war in Ukraine plays in the euro’s disadvantage as well.

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 doubt starting to filter through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP above the 0.8512 level. A sustained break would be a bad omen for sterling.

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).
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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