Monday, 31 January 2022

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•          US stock markets ended the week in the way they started: with serious volatility. Opening gains quickly faded into <1% declines before a furious late-session rally hurled the likes of the Nasdaq to more than 3% higher. Solid big-tech earnings (Apple) helped counter geopolitical and Fed policy uncertainty. Core bonds parted ways. USTs gained, bull steepening the curve with changes ranging from -2.6 to 4.6 bps at the short end and -1.8 to -2.9 bps for long tenors. German yields added 0.4 bps (2y) to 1.4 bps (10y). The USD held on to its gains and in some cases (AUD, NZD) extended the bull run on Friday. The trade-weighted dollar index eked out a new recovery high at 97.27. EUR/USD stuck near recent lows around the 1.1163 support (March 2020 interim high). EUR/GBP traded similarly with the pair unable to leave the two-year lows near the 0.83 zone behind.


•          An FT weekend interview and Chinese data are talk of the town this morning. About the former: Atlanta Fed governor Bostic told the Financial Times that every option is on the table, including a 50 bps rate hike if the data warrant it. He’s the first Fed member to mention it this explicitly. On the date front, Chinese PMIs signaled further loss of economic momentum. The Caixin gauge (from Markit) for manufacturing even fell into contraction territory (49.1 vs 50 expected). A factory slowdown is not unusual in the run-up to the one-week holiday for China’s Lunar New Year. It’s testament to the overall economic easing (Covid nonetheless. Anyway, Asian-Pacific stocks kick off the week in good spirits with gains of 1%. Core bonds decline with the short end underperforming, probably in response to the Bostic interview. The dollar is catching a breath after a stellar run last week.


•          Trading in Europe and the US is bound for a slow start given the bulging economic calendar, allowing a currently optimistic sentiment and technical considerations to take the driver’s seat for now. That’s to change later this week though. The Bank of England is due for a back-to-back rate hike on Thursday. The ECB is likely to keep looking the other way even if inflation, published the day before, will remain way above target. It will probably prevent the euro a meaningful comeback, if any. We’re keen to see rates markets react though. They will probably keep the pressure high. Euro area money markets are currently discounting more than two 10 bps rate hikes by end 2022. ISM business confidence and the first payrolls report of 2022 are due in the US. Central banks in Australia and the Czech Republic fill in some of the remaining gaps.

News Headlines

•          Slovenian parliament will today vote on a measure which puts a retroactive cap on the FX losses suffered by borrowers in low-yielding foreign currencies like the Swiss franc. Several other CEE-countries are already dealing with this problem. Under Slovenian the proposal, which was labelled problematic for the local banking sector by a non-binding ECB-opinion, banks would need to repay for any extra costs incurred beyond 10% going back to 2004. Banks warn that costs will be much larger than the €300mn estimated by in the proposed bill. The latter also includes penalties and potential revocation of banking licenses if financial institutions fail to repay borrowers in time.


•          Eighth time is a charm. The eight ballot to find a new Italian president finally delivered an (unexpected) winner on Saturday. The outgoing president, 80-yr old Mattarella, who previously said that he was no longer the best fit and unwilling to stand for re-election, will stay on. “Duty of the nation, must prevail over my own personal choices”. Mattarella’s re-election means that the ultimate goal – keeping Draghi on as PM of the government as national unity – was reached. The presidential ballot showed how fragile the collaboration between centre-left and centre-right blocs is. They hope that Draghi will steer them through a difficult 2022 reform year, avoiding snap elections and political chaos ahead of the planned ballot in 2023.


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 correcting stock markets.

The US 10-yr yield took out the October top at 1.7%. The psychological 2% mark is next resistance. The Fed’s hawkish policy turn triggered a surge in real yields. A March rate hike and June start of balance sheet reduction become the most likely scenarios. Core bonds and stocks to sell-off in lockstep again?

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, but the pair failed to take out next high-profile resistance at 1.1495 as surging US real yields came to the greenback’s rescue. Losing the November low at 1.1186 opens the path to 1.1040 (76% retracement on 2020 rally).

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

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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