Tuesday, 19 July 2022
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Markets

•          Especially European markets yesterday showed a remarkable risk-on mood despite multiple event risks (ECB meeting, Italian political crisis, Russian gas supply to Europe, EMU PMI’s) looming large over the next days. Several (also hawkish) governors last week indicating the Fed won’t step up the pace of rate hikes to 100 bps provided some comfort for risk-takers globally. European equities (including Italy) mostly gained about 1.0%. US indices opened with a similar but gain but reversed gains on Bloomberg headlines that Apple is considering to slow hiring and spending to cope with an economic downturn. US equities eased between 0.69% (Dow) and 0.84% (S&P). Still, US yields maintained most of their intraday gains rising between 5.4 bps (2-y) and 8.0 bps (30-y). In a broader perspective, US yields across the curve are still captured in sideways consolidation pattern around the 3.0% pivot as markets are assessing a potential top in the Fed rate hike cycle in case the US central bank would get more evidence on an economic slowdown later this year. European interest rates showed a similar move with German yields adding between 5.5 bps and 8 bps (10 & 30-y). European yields avoided a sustained break below key technical levels (Euro 2-y swap 1.05/1.10% area, Euro 10-y swap 2.0% area, 10-y bund 1.12/1.18% area). However, for now the downside (in yields) still looks less solid compared to the US. The 10-y Italian spread over Germany eased 7 bps, despite persistent political uncertainty. Brent oil jumped north of $ 100 p/b (close $106+). Market apparently aren’t convinced that Saudi Arabia/OPEC+ will be able to add supply as asked for by US President Biden. The DXY USD index dropped below 107 on the early session risk rebound, but bottomed later (close 107.37). EUR/USD tested the 1.02 but closed off the intraday peak at 1.015. Sterling initially outperformed the dollar and the euro as BoE’s Saunders advocated to raise the policy rate north of 2% next year even as growth slows. However, sterling couldn’t maintain the initial momentum. EUR/GBP closed at 0.8487 holding recent ST 0.8403/0.8515 consolidation pattern.

•          Asian equities mostly trade with modest losses after yesterday’s intraday setback on WS. US yields are easing 1/2bps. The dollar struggles to avoid further correction (DXY 107.35; EUR/USD 1.015, USD/JPY 138). The eco calendar contains the final June EMU CPI and US housing starts and permits. The US housing market recently cooled down as higher interest rates are feeding through. Another negative surprise might weigh on US yields and the dollar intraday. For now we don’t see a strong case for sustained euro strength. The EUR/USD 1.0201/21 mark first resistance. A break would probably signal a further ST repositioning on the USD rather than anything else. This morning UK labour market data (unemployment rate 3.8%) were OK but close to expectations in general. We don’t expected any lasting impact on sterling. Keep an eye at the speech of UK Governor Bailey at Mansion House.

News Headlines

•          A study by polling forms YouTrend and Cattaneo Zanetto & Co showed that the bloc of Italy’s conservative parties is likely to win a clear majority at the next elections. These might come as early as September should PM Draghi fulfill his threat to quit when he addresses parliament tomorrow. The polling firms calculated that the rightist bloc, including League Party, Forza Italia and Brothers of Italy would win up to 221 seats out of the 400 in the lower house and 108/200 in the Senate. Brothers of Italy currently tops the polls, garnering support of more than 22%. This would launch party leader Meloni, or the person she nominates, in pole position to become the new prime minister.

•          The European Commission in a draft plan estimates the total cut-off of Russian gas supply would cut growth by 1.5 ppts in case of a cold winter. An average winter would lower GDP between 0.6 and 1%, Bloomberg reported citing the document. But in case of early and coordinated action by member states, this may be reduced to just 0.4%pt. The EU is scrambling to top up natural gas stock levels ahead of the winter. There is much uncertainty at what volume the Nord Stream 1 pipeline will resume after maintenance works are scheduled to finish July 21. Fears are that it will remain closed for an unspecified period. Storage levels are currently above 63%, in line with the historic average. This should be 80% at the start of November.

Graphs

The ECB turned the corner in its inflation narrative. The central bank ended net asset purchases, facilitating rate hikes from this month. German 10-yr yield pushed through to the highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower on increasing growth worries. First important support at 1.18%/1.12% remains under pressure.

The Fed started an aggressive tightening cycle. Another (June) inflation surprise raised the odds for a 100 bps hike in July instead of the flagged 75 bps one. QT will hit max speed by September. But markets discounted a good deal already and focus is at least as much on growth. The 2.72% area was tested but didn’t break. Sideways consolidation over the summer is in the cards.

The euro zone’s (energy) crisis is being accompanied by an unfolding Italian political crisis. Markets ponder the ECB’s ability to deliver rate hikes in such circumstances, even with inflation being sky high. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity is being tested. A sustained break lower paves the way towards intermediate support around 0.96 before a return to the all-time low of 0.823.

The BoE in June signaled it might step up tightening. Initially this didn’t help sterling. However, a combination of euro weakness, PM Johnson leaving, the sharp correction in the oil price and the BoE reiterating its anti-inflation commitment, finally triggered a sterling short squeeze, pushing EUR/GBP below the established uptrend.

Calendar & Table

Contacts

 
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Mathias Van der Jeugt +32 2 417 51 94
Peter Wuyts +32 2 417 32 35
Mathias Janssens +32 2 417 51 95
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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.
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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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