Friday, 17 June 2022
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•          Trading was extremely volatile yesterday. Sentiment already turned more fragile immediately after the European open, despite a constructive post-Fed close in the US Wednesday. An unexpected rate hike from the Swiss National Bank (SNB) was enough to trigger a new hawkish spin. Especially European yields jumped sharply higher. Several German/EMU yields came close to or even touched new cycle peak levels intraday (e.g. German 10-y 1.92%, EU 10-y swap 2.72%). Moves in US bonds were less aggressive and recent top levels (in yields) stayed out of reach. Sentiment, especially on US bond markets, again turned completely in US dealings. A series of poor US data (jobless claims miss, disappointing Philly Fed outlook and a new sharp decline in US housing starts and permits) intensified fears that the Fed’s anti-inflation campaign might come at a huge cost for growth. In the end, US yields even declined between 9.75 bps (2-y) and 8.1 bps (30-y). The US 10-y yield intraday almost touched the 3.5% barrier, but the test was (decisively) rejected. German/European interest rate markets also made huge intraday swings. Yields also closed well of the intraday/new cycle peak levels. German yields gained between 8.2 bps (2-y) and 4.7 bps (30-y) as markets understand that the ECB still has some catching up tightening to do. Intra-EMU spreads narrowed further as the ECB is ‘finetuning’ a new instrument to prevent market fragmentation. As the intraday decline in US yields was driven by worries on (US) growth, it didn’t help equities. On the contrary. US indices lost again up to 4.08% (Nasdaq). The EuroStoxx 50 ceded 2.96%.With US growth being source of uncertainty, the dollar didn’t gain from the risk-off. DXY closed at 103.63 (top of 105.78 post Fed Wednesday). EUR/USD initially dropped below 1.04, but the 1.0340 support stayed out of reach. After a nice intraday rebound, EUR/USD closed at 1.0550. Sterling profited as the BoE raised rates by 25 bps and signaled to step up rate hikes if the inflation outlook doesn’t improve (EUR/GBP close 0.8542). The Swiss franc evidently also was an outright winner (close EUR/CHF 1.02).
•          This morning, the BOJ left the targets for the policy rate (-0.1%) and for the 10-y bond yield unchanged. The BOJ indicated that it will monitor the impact of the currency on the economy. Still, this isn’t enough to change its guidance to keep rates at present or a lower levels. After temporary declining below 132 yesterday (admittedly partially on USD weakness), USD/JPY this morning rebounds on renewed yen weakness (USD/JPY 134.00). Sentiment on most Asian markets (except China) remains risk-off, but losses are more modest compared the WS yesterday.
•          The eco calendar is thin today, with only US production data. Uncertainty on the consequences of the Fed aggressive tightening for growth apparently makes especially US markets conclude that enough anticipation on further hikes is discounted. If so, recent peak levels in US yields might provide strong resistance. This could also block further USD gains for now. EUR/USD might again settle in the 1.0350/1.08 trading range.

News Headlines

•          The World Trade Organization ended its 12th Ministerial Conference today by agreeing on a package of accords. The bodies’ consensus approach often ends with impasses given the difficulty to align 164 members. The deal includes a reduction of fishery subsidies, an intellectual-property waiver for Covid-19 vaccines, a temporarily renewal of the moratorium on e-commerce duties and pledges on health and food security. India’s demand to water down the trade body’s subsidy rule for public stockholding programs to feed the needy will be looked at by the next MC.

•          Argentina raised its key policy rate by 300 bps to 52%. It’s the sixth rate hike this year, starting from 38% end last year. We’re still nowhere near the pre—pandemic level of 86% in September 2019. The rate hike comes on the heels of this week’s inflation print. May inflation surged to a 30-yr high of 60.7% Y/Y. The monthly dynamic slowed to 5.1% M/M. The central bank hopes that this decreasing trend to gradually continue. Apart from price pressures, the central bank cited the rising perception of financial risk and the need to spur saving in the feeble Argentine peso…


Real yields took over from inflation expectations in pushing the German 10-yr yield beyond long term resistance at 1.13% (2012 & 2013 bottoms) to 1.24% (38% retracement on 2008-2020 decline). The next technical reference are 1.9% (50% retracement) to 2.09% (2013 high). The ECB finally turned the corner in its inflation narrative. The central bank will end net asset purchases this month, facilitating rate hikes from July.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hikes in July is still on the table. Quantitative tightening will hit max speed by September. After a small correction in May, anticipation on even faster Fed tightening pushed the 10-y yield above the 3.2% (YTD high)/3.26% (2018 high) resistance. For now the 3.5% looks to provide strong resistance

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. A persistent risk-off supports the dollar again. The 1.0341 area is again on the radar.

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. Open division within the BoE and the limited room for further tightening pushed EUR/GBP towards 0.872 resistance. The BoE in June signaled it might step up tightening, but it is unsure whether this will change fortunes 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). Read the full disclaimer.

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