Tuesday, February 8, 2022

Daily Market Overview

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• It’s another news thin trading session with huge central bank meetings behind us and counting down to Thursday US inflation print. Underlying dynamics on bond markets doesn’t change though with persisting selling pressure. The US yield curve bear steepens ahead of 10-yr and 30-yr bond sales by the US Treasury. US yields add 3 bps (2-yr) to 4.6 bps (10-yr). The US 10-yr yield trades at 1.96%, eyeballing the psychologic 2% barrier for the first time since early 2019. The German yield curve moves in similar fashion with very long Bunds even underperforming US Treasuries. Obviously, there’s quiet some catching up to do assuming that net asset purchases could already end somewhere early H2 2022 while the ECB’s reinvestment pledge (at least 2024 for PEPP) probably also looks unsustainable given normalization paths of the BoE (natural balance sheet run-off to start now) and the Fed (run-off somewhere in June?). German yields add up to 6.7 bps for the 30-yr. The German 30-yr yield closes in on 0.50% resistance which is the 2021 top. 10-yr yield spreads vs Germany face more widening pressure especially for Italy (+6 bps). The Italian spread moves north of 160 bps for the first time since July 2020. The Kingdom of Spain announced a new 30-yr syndicated deal (likely to be launched tomorrow) before the window of opportunity really closes. UK Gilts underperform both Bunds and US Treasuries, rising by 7.1 bps (2-yr) to 8.8 bps (30-yr) across the curve. The UK National Institute of Economic and Social Research (NIESR) took a swipe at Bank of England governor Bailey. He last week urged pay restraint in order to avoid a wage-price spiral. NIESR deputy director Mortimer-Lee stressed that it’s not an individual employee’s job to the do the BoE’s job for it. He thinks that the BoE has fallen behind the curve by 6 to 9 months and has to play catch-up. The MPC left too much fuel around and all it needed was an inflationary spark to light it up. NIESR raised its inflation forecast for UK inflation to 5.9% in 2022 and 3.3% in 2023. Sterling can’t really profit from this rising (ST) yield differential with EUR/GBP sliding gently from 0.8450 towards 0.8420. It’s a more or less parallel move with EUR/USD. The pair changes hands in the low 1.14 area from an 1.1442 open. Stock markets manage to keep their composure despite the new bond sell off with most European and US equities currently trading with minor losses. In other markets, Brent crude declines from $92.5/b to $91/b after French President Macron said that he got assurances from Russian president Putin that the Ukrainian conflict won’t escalate further.
News Headlines

• The European Union today announced that it intends to invest €43bn via its Chips act. The initiative will enable €15bn in additional private and public investment by 2030. This comes on top of €30bn of public investments that were already in the NextGeneration EU budget. The Plan intends to support the building of new semiconductor factories in order to reduce the EU’s dependency from Asian and US markets. In this context, the EU also will adapt its state aid rules under strict conditions to ‘allow – for the first time – public support for European 'first-of-a-kind' production facilities, which benefit all of Europe’. The EU wants to double in market share in semiconductors to 20% in 2030. The US government also already announced a $52bn plan to support the national chips production
• According to data published by the Czech Statistical Office, retail sales in December slowed quite substantially. Seasonally adjusted real sales printed at 2.1% Y/Y from 9.9% in November. Sales excluding motor vehicles even eased from 13.0% to 3.3%. For both series a substantially higher figure was expected. The jury is still out on the reason for the weaker than expected performance. Higher inflation eroding purchasing power might be part of the explanation. In a different report, the December unemployment rate rose from 3.5% from 3.6%.The Czech koruna was little affected by the data and trades stable near EUR/CZK 24.30.

Graphs & Table

US 10-yr yield closes in on psychological 2% barrier

Brent crude corrects somewhat lower as Macron suggest no more escalation in Ukrainian conflict

EUR/GBP: sterling doesn’t really benefit from rising ST interest rate support today

EUR/PLN: new 50 bps Polish rate hike (to 2.75%) was discounted. EUR/PLN 4.50 provides strong floor

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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