Monday, September 5, 2022

Daily Market Overview

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• Markets’ sole focus is on Gazprom’s announcement last Friday that gas flows through Nord Stream I will be halted for an undetermined amount of time to fix an oil leakage spotted during scheduled maintenance. The announcement coincides with Friday’s G7 finance ministers’ decision to introduce prices cap on Russian oil exports and comes a week ahead of an emergency power summit by energy ministers on Friday. European gas prices surge over 25% today (Dutch TTF future), ending last week’s correction lower. Oil prices are rallying as well with Brent crude leaping from $93/b to $96.5/b as OPEC+ agreed to cut production by 100k b/d in October. The move completely reverses the September increase. It remains rather small in absolute terms, but nevertheless sends a signal to the market about OPEC+’ sensitivities. They especially fear a setback in oil demand on feeble eco forecasts. It’s also a public secret that the Saudi crown prince likes to see oil trading near $100/b. Core bonds are back in sell-off mode despite the risk-off market climate. Higher energy prices amplify worrisome inflation dynamics which are currently on top of mind of central bankers. They put the benefits of long term anchored inflation expectations above short term economic malaise. In that respect, we still expect a hawkish 75 bps rate hike by the ECB on Thursday. The German yield curve bear flattens with yields rising by 6.4 bps (2-yr) to 4.7 bps (30-yr). 10-yr yield spreads vs Germany widen by 2 bps with Greece (+5 bps) and Italy (+8 bps) underperforming. Today’s announcement of a syndicated long 12y deal (Apr2035) (tomorrow) adds to the underperformance. The Italian 10y yield approaches 4% again with the spreads vs Germany close to testing the June and July (and 2020) high of 240 bps. US markets are closed for Labour today but the US T-Note future follows the global move south. The euro suffers from the combination of higher energy prices, a difficult risk climate (European bourses lose up to 2.5%, though remain above last week’s sell-off lows) and peripheral spread widening. EUR/USD set a new 20-y low at 0.9878, before returning to the low 0.99 area. CEE currencies are even worse off than the single currency today. Liz Truss’ victory over Rishi Sunak as new Conservative leader and prime minister was discounted and didn’t hurt sterling. EUR/GBP trades volatile in the 0.86 big figure.
News Headlines

• The People Bank of China reduced the reserve ratio on foreign exchange reserves from 8% to 6% starting from September 15. The reduction intends to raise ‘financial institutions ability to use foreign exchange capital’. Given $953bn of FX reserves end July, the RRR cut is expected to free around $19bn of FX. The higher availability of foreign currency relative to the yuan ceteris paribus should support the Chinese currency. The move is in line with other signals from the PBOC (stronger than expected daily FX fixings) of late that it wants to slow the recent CNY losses. USD/CNY declined from 6.94+ levels to 6.932 after the cut, but the yuan still trades substantially weaker compared to end last week (close near 6.90 on Friday).
• Turkish inflation rose 1.47% M/M to 80.2% Y/Y in August (2.37% M/M and 79.60 Y/Y in July). Still, headline inflation was slightly softer than expected. Core inflation accelerated to 66.08% from 61.69%. In a monthly perspective, a 1.78% decline in transportation costs ‘mitigated’ the rise in inflation. The cost of health (7.01% M/M) and education (6.55%) showed the highest monthly increases. Turkish PPI shows tentative signs of slowing at 2.41 % M/M and 143.75% (from 144.61%). The monthly rise in PPI was the slowest since September last year. In new economic forecasts published this weekend, the government raised its full year inflation forecast to 65% and assumes it to slow to 24.9% next year. Growth is expected at 5.0% for 2022 and 2023. A sharp rise in the trade deficit ($105 bn) will propel the current account deficit to 5.9% this year, but the government expects/hopes it to come down to 2.5% in 2023. In line with recent price action, the lira reacted stoic to the inflation data and global sentiment. EUR/TRY even slightly declined to currently trade at 18.08.

Graphs & Table

Gas prices (Dutch TTF, €/MWh) gap about 30% higher after Russia closes taps for undetermined period of time.

USD/CNY: PBOC lowered FX reserve ratio by 200 bps, freeing up to $19bn of FX. Yuan only marginally profits.

EMU 2y swap holds near cycle highs as surging (gas) prices leave ECB no choice but to hike dramatically.

EuroStoxx50 pares losses from 2.5% to 1.5%, leaving last week’s lows in tact for the time being.

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). Read the full disclaimer.

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