Wednesday, October 5, 2022

Daily Market Overview

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• The bond-equity short-squeeze/risk rally from yesterday and Monday petered out in Europe this morning as markets reassessed chances of major central banks nearing the end of their tightening cycle. Today’s ‘hawkish’ 50 bps RBNZ hike for sure wasn’t the main driver. Bond yields in New Zealand even eased further after the RBNZ policy decision. At the same, time RBNZ even pondering a 75 bps rate hike illustrated that central bankers still have divergent views on what path they have to walk to bring inflation sustainably back to target. Yesterday, yields already rebounded off intraday lows and this move continued today. The US ADP labour market report was the next data set potentially guiding the debate whether Fed tightening is gradually cooling US excess aggregate demand. However, the 208k September private job growth was very close to expectations. A 53k upward revision for last month’s figure suggests that a slowdown in hiring, if any is developing at a very gradual pace. The US August trade deficit at $67.4 bln was also exactly in line with market expectations. Admittedly, the data release with most market potential, the US non-manufacturing ISM, still has to be published after finishing this report. In what probably should be characterized as a technical rebound, US yields are rising between 6 bps (2-y) and 10 bps (10-y). EMU swap yields in a similar move gain between 5 bps (2-y) and 10 bps (10-y). On intra-EMU bond markets, the Italian 10-y spread versus Germany widened 12 bps. Maybe some investors expected some news on QT from today’s ECB non-monetary policy meeting. PEPP reinvestment data published today also showed that net purchases of Italian bond were slightly negative during the August 22/September 22 period (-1.243 mln). The rebound in core yields also blocked this week’s impressive equity rebound. The EuroStoxx50 is ceding 1.15%. US indices opened with a similar loss. For now, the sell-on upticks dynamics apparently hasn’t halted yet. Oil extends its rebound with Brent trading at $93 p/b as markets await the outcome of the OPEC+ meeting in Vienna. The group is reported to discuss a big 2 mln p/b production cut. For now there is no formal decision yet. The EU also agreed on sanctions including an price cap for Russian oil to be transported to third countries.

• On FX markets, the dollar show the logical comeback in line with core yields as the risk rally is running into resistance. DXY regains the 111 handle. EUR/USD yesterday evening and early this morning almost touched parity but in a gradually but protracted move currently already returned below the 0.99 big figure. USD/JPY is still locked in a very narrow short-term trading range (144.5). Sterling weakens further even as UK yields rise more than their EMU counterparts. UK PM Liz Truss at the Conservative party conference confirmed the government’s aim to maintain a growth supportive policy. EUR/GBP extends gains beyond the 0.8721 previous top (currently 0.874).

News Headlines

• EC President von der Leyen welcomed Member States’ agreement on the 8th sanctions package against Russia. “We have moved quickly and decisively. We will never accept Putin’s sham referenda nor any kind of annexation in Ukraine. We are determined to continue making the Kremlin pay.” The new package prohibits maritime transport of Russian oil to third countries above an oil price cap. Bans on goods including steel products and providing IT, engineering and legal services to Russian entities will be extended. There are also restrictions on Russian access to aviation items, electronic components and specific chemical substances.

• The World Trade Organization (WTO) updated its April forecasts. World trade is expected to lose momentum in H2 2022 and remain subdued in 2023 as multiple shocks weigh on the global economy. The WTO now predicts global merchandise trade volumes will grow by 3.5% in 2022 (from 3% in April). For 2023they foresee a 1.0% increase (from 3.4%). World GDP at market exchange rates will increase by 2.8% in 2022 and by 2.3% in 2023 (from 3.2%). Trade and output will be weighed down by several related shocks, including the war in Ukraine, high energy prices, inflation, and monetary tightening.

Graphs & Table

EUR/PLN: zloty eases (albeit modestly) as NBP unexpectedly leaves policy rate unchanged at 6.75%.

German 10-y yield tries to regain 2.0% handle after recent correction.

USD DXY index regaining traction as risk rebound peters out.

Oil extends rebound as OPEC+ is discussing a major 2 mln bpd production cut.

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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