Friday, 21 January 2022

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•          Yesterday, investor confidence faded throughout the day and finally resulted even in a standard risk-off repositioning. A positive risk sentiment in Asia encouraged by the outlook for further PBOC easing initially only modestly inspired European investors. US equities tried to do better despite mixed US data, including an unexpected jump in US weekly jobless claims as omicron dented activity (286k vs 231k expected). Initial US equity gains of 1.5%/2.0% apparently were seen as an opportunity to further offload risk. European indices ended near best levels of the day (EuroStoxx +0.73%). However, a late session US sell-off resulted in losses of up to 1.30%. The risk-off this time also supported a (temporary?) change the dynamics on the bond markets. Of late, bond sales/higher rates in anticipation of accelerated Fed rate hikes weighted in risky assets. Yesterday, some investors apparently concluded that US yields had risen enough for bonds to retake their safe haven role. US yields and the end of the day declined between 3.2 bps (2-y) and 6 bps (5 & 10-y). The move was more or less equally divided between real yields and inflation expectations. A setback in oil prices didn’t help to support sentiment. European yields ended with modest losses between 0.7 bps (2-y) and 2.1 bps (30-y). The accounts of the December ECB policy meeting showed some (hawkish) members made reservations both on the ECB’s assessment of inflation as well as on the proposed package with respect to monetary policy. Even so, it doesn’t look that the hawks had the leverage to profoundly alter the ECB’s anti-inflation strategy anytime soon. On the FX market, the dollar initially showed no clear trend. However, at the of US dealings FX also returned to a ‘standard’ risk-off move. The yen slightly outperformed the dollar (USD/JPY close at 114.11). At the same time DXY rebounded to close at 95.73. EUR/USD drifted further south in the 1.13 big figure (close 1.1312). Sterling initially traded strong with EUR/GBP setting a new cycle low, but the UK currency returned some of its gains in the late session repositioning (close EUR/GBP 0.8317).

•          Yesterday’s late session setback in the US is spilling over to Asia this morning with regional indices losing up to 2.%+ (Australia). Core (US) yields continue their decline. At the same time, the dollar fails to extend yesterday’s rebound. (EUR/USD 1.133, USD/JPY 113.85).The eco calendar is thin with only the EC consumer confidence scheduled for release. Risk sentiment will continue to set the tone for trading going into the weekend. We don’t see a trigger for a short-term improvement. Markets will also keep a close eye at the meeting between US Secretary of State Blinken and the Russian Foreign minister Lavrov in Geneva. However, there are currently few signs that tensions on Ukraine will ease anytime soon. The US 10-y yield is retesting the 1.77%/1.80% previous resistance. A break would hint on a further rebound in core bonds. The dollar takes a poor start this morning, but in a daily perspective, we give the US currency the benefit of the doubt. UK retail sales this morning were materially weaker than expected (-3.7% M/M). Together with a poor risk sentiment, this probably caps further sterling gains in a daily perspective.

News Headlines

•          Japanese inflation quickened from 0.6% to 0.8% y/y in December last year. Core measures stabilized at 0.5% (excluding food) or even eased to -0.7% (excluding food and energy), suggesting broadening price pressures remain limited for the time being. The outcome pours additional cold water over BoJ rate hike speculation triggered by a Reuters report last week. While the central bank earlier this week did change its assessment of inflation risks to balanced, governor Kuroda later added that the start of policy normalization is “absolutely not” on the table. The Japanese yen gains this morning though that’s solely the result of Asian risk-off. USD/JPY trades at 113.82.

•          UK GfK consumer confidence unexpectedly declined from -15 to -19 in January, the lowest level since the lockdowns in early 2021. Confidence in the economy one year ahead fell from -24 to -32. A three-point drop from 1 to -2 (the lowest since November 2020) reflected growing concerns over personal finances over the next 12 months. Saving intentions hover near the 2021 lows. GfK’s Staton explained consumers are “clearly bracing themselves for surging inflation, rising fuel bills and the prospect of interest rate rises”, suggesting the cost-of-living crisis took was now the major concern instead of the pandemic.



Long term EU bond yields sprinted higher end December after the ECB didn’t really commit to strong asset buying post-PEPP with a potential end by late 2022. Simultaneously, the impact of the Omicron wave seems manageable. The move was equally driven by higher real rates and rising inflation expectations. The break above -0.20% was followed by swift gains with a return to the symbolic 0%.

The US 10-yr yield took out the October top at 1.7% with the 1.80% 2021 high broken, but currently revisited . The Fed’s taper acceleration and hawkish message at the December meeting/minutes triggered a surge in real yields. A March rate hike and 2022 start of balance sheet reduction become the most likely scenarios.

The dollar fell prey to profit taking after December inflation data. EUR/USD was able to escape the 1.1186/1.1386 trading channel in place since end November. The pair for now failed to take out next high-profile resistance at 1.1495 as surging US real yields came to the greenback’s rescue.

EUR/GBP fell below the previous sell-off low at 0.8381 in the wake of the Bank of England’s first rate hike since July 2018. A positive risk environment supported GBP as well. UK Gilts underperform German Bunds with another rate hike by the BoE in February being our base case and granting the UK currency short term interest rate support. Next target: EUR/GBP 0.8282.

Calendar & Table

Data Source : Bloomberg

Note: All times and dates are CET. More reports are available at

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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