Tuesday, February 1, 2022

Daily Market Overview

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• Short-term yields in the US and Europe finally took a breather after a sharp hawkish repositioning. Fed Powell at last week’s policy meeting signaled the Fed would accelerate policy normalization as inflation is rising faster than expected and probably will last longer than the Fed anticipated until now. Powell’s view for sure prevails within the Fed. However, after Raphael Bostic yesterday opened the debate on a 50 bps rate hike in March, other colleagues (George, Daly) overnight advocated to stick to a gradual approach. Whatever the trigger, markets almost discounting five 25 bps rate hikes this year apparently provides a good enough reason for the interest rate rally to take a pause. The US yields curve slightly steepens with ST yields ceding about 1.5 bps (2-y) as 10’s and 30’s are raising marginally (0.5 bps). The rise in European interest rate markets also slowed, but Europe still slightly underperforms the US with the German yields gaining up to 2.0 bps (30.-y). In line with data evidence from other EMU countries over the previous days French January inflation printed stronger than expected at 0.1% M/M and 3.3% Y/Y (from 3.4%) raising the risk of an upward surprise for the European HICP scheduled for release tomorrow. Anyway, it will be interesting input as the ECB debates monetary policy at its first regular meeting of the year on Thursday. Interestingly, at -0.48% the German 2-y yield is touching the highest level since early 2016 and finally returned north of the ECB deposit rate! The relative calm on the bonds markets also supports a further comeback of equities. European indices are rebounding 1%/1.5% on average. US indices are opening little changed to marginally lower after significant daily gains on Friday and yesterday.

• The dollar in the second half of last week was a major beneficiary of the higher short-term US yields and a spike in global volatility post-Fed. However, yesterday, the euro started a remarkably comeback, as short-term interest rates show investors grow ever more convinced that the ECB will be forced to amend its guidance not to raise interest rates until asset purchases will be finished at earliest end 2022. Despite limited moves on interest rate markets today, the euro maintained a positive momentum. EUR/USD is testing the 1.1270 area (compared to a correction low near 1.1121 end last week). At the same time, the dollar is losing further momentum. This doesn’t only apply to EUR/USD. USD/JPY (114.75) and the DXY index (96.31) are also falling prey to further profit taking. After a euro driven rebound yesterday, EUR/GBP today traded sideways near the 0.8350 pivot, awaiting more BoE guidance as Bailey an Co are expected to continue the rate hike cycle at Thursday’s policy meeting.  

News Headlines

• The Czech Statistical Office published preliminary Q4 GDP numbers today. The economy grew by 0.9% Q/Q and by 3.6% Y/Y, significantly beating consensus (0.2% Q/Q & 2.9% Y/Y). External demand was the biggest growth engine in this quarter. Over the whole of 2021, the Czech economy grew by 3.3% compared to 2020. The growth was supported by final consumption expenditure and a change in inventories, whereas external demand had a negative influence. Employment increased by 0.1% in 2021. In Q4, it remained unchanged in Q/Q terms. The Czech Koruna remains well bid today going into Thursday’s CNB meeting which is expected to deliver another 75 bps rate hike (to 4.5%). EUR/CZK drops towards 24.25 and seems ready for a test of the sell-off low at 24.20.

• The European Central Bank published its January bank lending survey. Credit standards for loans or credit lines to enterprises tightened very slightly in Q4 2021. Regarding loans to households for house purchases, EMU banks reported unchanged credit standards while credit standards for consumer credit and other lending to households eased moderately. Banks continue to hold an overall benign view of firm credit risks, owing mainly to a positive assessment of economic outlook. In Q1 2022, banks expect credit standards to remain broadly unchanged for loans to firms, to tighten moderately for housing loans and to ease further for consumer credit. Banks reported, on balance, a considerable increase in firms’ demand for loans or drawing of credit lines in Q4 2021.

Graphs & Table

EUR/CZK: koruna extends rally as high inflation and solid growth reinforce the case for additional CNB tightening

EuroStoxx50 nears previous neckline at 4231

2-y German yield rebounds north of ECB deposit rate.

EUR/USD: rebounds off correction low but remains below lost uptrend channel

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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