Tuesday, 21 June 2022
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Markets

•          With US markets closed for Juneteenth, trading was confined to Asia and Europe yesterday. The economic calendar contained no important data but several high-profile speeches, including from president Lagarde as she appeared before the European Parliament. She didn’t spill the beans though and simply sticked to the normalization path laid out at the June meeting. Neither did she dwell on the outcome of the emergency meeting or on the details of the new bond-buying tool. Turning to markets, core/German bonds initially looked as if economic growth would once again take over from the inflation & tightening narrative. Further easing commodity prices (eg. oil) provided similar clues. But that soon changed with German yields eventually adding 5.9 bps (2y) to 9 bps (30y), be it in low-volume trading. European stock markets rose about 1%. The dollar traded a tad softer. The trade-weighted index (DXY) stabilized near Friday’s closing levels but EUR/USD eked out a gain to close just north of 1.05. EUR/GBP tried to reconquer the 0.86 barrier but failed to do so (close at 0.858). Norway’s krone outperformed G10 peers after a losing streak that brought EUR/NOK to the highest level since August last year. The pair eased from 10.5 to 10.42 yesterday. The Norges Bank is meeting on Thursday.
 
•          Equities in the Asian-Pacific region are better off than yesterday. Gains mount up to 2.5% in Japan. US yields add about 5 bps across the curve after cash markets reopen from a long weekend. Yields in Australia went in reverse after RBA governor Lowe dampened expectations for a 75 bps hike. He added that policy rates of 4% by year-end, as expected by markets, is unlikely. The Aussie dollar trades stable sub AUD/USD 0.70. Moves on other currency markets are muted too. The Japanese yen (USD/JPY 135.02) is unimpressed by an umpteenth verbal intervention by Japanese MinFin Suzuki.
 
•          US markets join the rest in the waiting game today. The economic calendar only starts to heat up from Wednesday with UK CPI, EMU consumer confidence and Fed chair Powell’s semi-annual testimony before Congress. It may mean a quiet trading day within the bigger picture of some short-term consolidation on core bond markets. As dust settles a bit after a volatile last week, we expect the dollar to continue topping out for the time being. EUR/USD 1.0601 serves as first intermediate resistance. Sterling investors will probably stick to the sidelines, awaiting key data (CPI, PMI and retail sales) that may affect Bank of England tightening expectations.
 

News Headlines

•          Israelian PM Bennett yesterday announced that he and foreign minister Lapid had decided to dissolve parliament, making way for the fifth election in four years and setting the stage for a potentially sooner than hoped for return of current opposition leader Netanyahu. Lapid will become caretaker PM in the run-up to a ballot which should take place before the end of October. Bennet’s fragile coalition, which centered more around the will to oust than sitting PM Netanyahu rather than around political ideas, already lost its majority earlier this year following the resignation of two MP’s.

 
•          US President Biden hopes to have a decision on whether or not to suspend the federal gasoline tax (18.4 cents-per-gallon) in an effort to help protect household’s disposable income. The issuance of gas cards was under consideration, but unlikely at this stage. A gas-tax holiday cannot be signed off by executive order and thus needs congressional approval. Biden is also set to meet with oil industry executives this week after he told US oil refiners in a letter that “at a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable. Brent crude stabilizes around $115/b following Friday’s correction down from $120/b(+) levels.
 

Graphs

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. The persistent risk-off that supported the dollar has receded somewhat, alleviating immediate downward pressure.

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

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). Read the full disclaimer.

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