Monday, 24 January 2022

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•          Key US equity indices lost another 2% on Friday and more importantly high-level support marks. The S&P fell below the neckline of a triple top formation at 4495, suggesting more downward potential towards the October low of 4279 with the final target of the technical formation even at 4172. The tech-index Nasdaq was already in correction modus (>10% from all-time top in November), but now lost the neckline of a huge double top formation which served as resistance in H1 2021 (14175). The move lower suggests more downward potential towards 12552 (38% retracement since March 2020) and even the low 12 000 area (final target double top). The dominant reason for this year’s risk correction is obviously the surge in real rates because of the accelerated global push towards (central bank) policy normalization. It automatically brings us to this week’s main event: Wednesday’s FOMC policy meeting. We expect the Fed to lay the groundwork for a 25 bps March rate hike/lift-off. Abruptly ending net asset purchases (normally tapered down to zero in March) is a wildcard. We currently take into account a scenario of four consecutive 25 bps rate hikes in the US central bank’s inflation battle, before allowing for a pause once the central bank puts in motion pillar two of its normalization process: shrinking the balance sheet at stealth pace. Rapidly deteriorating inflation dynamics probably imply that risks surrounding this scenario are probably tilted to the hawkish side. This means potentially more and/or bigger rate hikes and a sooner start to winding down the balance sheet
•          Last week’s risk aversion ended the sell-off on bond markets who took up their role as safe haven assets. The US yield curve bull flattened with yields losing 2.2 bps (2-yr) to 4.5 bps (30-yr). German yields fell by around 4 bps across the curve. 10-yr yield spread changes vs Germany widened by up to 3 bps for Greece and Italy. The trade-weighted dollar lost on points, closing at 95.64 from an 95.81 open. CHF, JPY and EUR were the main beneficiaries (in that order) from the risk-off spell. EUR/GBP was short squeezed higher to test first resistance at 0.8381 in combination with horrible December UK retail sales. Today’s eco calendar contains January PMI numbers, but we doubt they’ll be able to steal the spotlight from risk sentiment and the approaching FOMC meeting. From the weekend, we retain comments by ECB governing council member Rehn in Handelsblatt saying that a 2023 rate hike would be the logical thing to do apart from any new economic disruptions.

News Headlines

•          Members of both houses of Italian Parliament and regional representatives start the potentially lengthy presidential election process today. To be appointed, a candidate needs a two-third majority in the first three rounds of the vote or a simple majority later in the process. The role of Italian President is mainly ceremonial, but the head of state controls key steps in the Italian political process including nominating the Prime Minister or dissolving parliament. PM Mario Draghi is in pole position to get the job. However, some of the parties currently supporting his government, said that Draghi leaving the post of PM would be a risk to political stability in the country. The vote is secret and some parties didn’t give public guidance. So, the outcome remains uncertain. Former PM Silvio Berlusconi this weekend stepped out of the race as a candidate for the job.
•          In response to questions posed by Bloomberg, hHead of the National Bank of Poland Glapinski said that he wants to convince members of its MPC to take a more aggressive approach on inflation and to raise interest rates more than markets currently anticipate. The comments came after stronger than expected industrial production (16.7% Y/Y for December) and wage data (+11.2% Y/Y) on Friday. The Polish policy rate has been raised to 2.25% after four consecutive rate hikes as inflation accelerated faster than expected (8.6% Y/Y in December). Today, Polish retail sales data are scheduled for release. The zloty late on Friday reversed most of its intraday, risk-off driven losses after the Glapinski headlines hit the screens. EUR/PLN this morning trades in the 4.525 area.


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. The move was driven by higher real rates. The break above -0.20% was followed by swift gains with a brief return above the symbolic 0%. Upleg currently interrupted by heavily correcting stock markets.

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. Risk sentiment temporarily interfering here as well.

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. 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 remained out of reach as dismal retail sales and risk aversion triggered short term short squeeze.

Calendar & Table

Data Source : Bloomberg

Note: All times and dates are CET. More reports are available at 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).
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.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
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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