Friday, May 13, 2022

Daily Market Overview

Click here to read the PDF-version of this report.


• Trading on global markets today enters calmer waters to finish a week with quite some wild swings. Early this week, it looked that established trends could simply continue. Long term yields in the US (30-y 3.30%; 10-y 3.20%) and Europe (German 10-y 1.18%, EMU 10-y swap 2.0%+) still touched new cycle peak levels. The EMU 2-y swap also temporarily surpassed 1.0%. In hindsight, maybe there was already an underlying warning signal as both EMU and US inflation expectations/10-y inflation swaps were drifting off recent peak levels. However, initially this was still more than counterbalanced by a higher real yield. This dynamic changed after the publication of higher than expected US (core) inflation on Wednesday. A brief attempt of yields to continue their uptrend was rejected and triggered a sharp reversal in interest rate markets which later was followed by broad sharp risk-off repositioning. Economic analysts concluded that investors grew uncertain whether central bankers would be able to do enough to bring inflation back under control without hurting growth too much. More technically oriented analysts probably will advocate that the almost uninterrupted uptrend in yields since the turn of the year was simply ripe for a correction. Whatever the narrative, both US and EMU/German yields sharply tumbled back the below the above mentioned high profile levels. ECB’s Lagarde opening the door for a July ECB rate hike didn’t help to slow the correction. Today interest rate markets apparently found a first short-term equilibrium. In a session devoid of key economic data (U. of Michigan Consumer confidence will be published after finishing this report), US and German yields rebound. US yields are gaining between 4 bps (2 & 30-y) and 6 bps (10-y). German yields are rising between 4.5 bps (2-y) and 8 bps (10-y). Remarkably, gains in EMU swap rates are limited. The ‘return to normal’ on interest markets also filtered through into equity markets. European equities mostly regain about 1.50%/1.75%. The risk of further mutual economic retaliation between Russian and Europe moved a bit to the background. US indices opened similar gains (Nasdaq +1.90%, S&P +1.25%). Oil rebounds further, with brent trading at $ 110 p/b.
• The sharp swings post the US CPI data also triggered a standard risk-off repositioning on FX markets. The dollar fully played its safe have role with the DXY TW index yesterday touching the highest level since 2002, just below the 105 mark. However, the yen also made a somewhat remarkable comeback with USD/JPY easing off the 131+ levels reached earlier this week. A less negative interest rate differential apparently helped the yen. Today, the DXY index (104.90) continues testing the multi-year peak. USD/JPY returns to the 129 area on a risk-on sentiment and higher core yields. The euro remains in dire straits. The risk-off repositioning pushed EUR/USD below the 1.0472/1.05 support. The prospect of an ECB lift-off in July didn’t provide any relief. Even in a more constructive sentiment, EUR/USD today still feels the forces of gravity (EUR/USD 1.036). The 1.0341 2017 low is only a whisker away. Poor Q1 growth data and division within the BoE on the pace of further rate hikes temporarily pushed EUR/GBP above 0.86 yesterday. However, euro weakness ‘restored’ the EUR/GBP balance rate with the pair today trading in a tight range close to/slightly above 0.85(1).

News Headlines

The Hungarian central bank’s vice governor Virag said the central bank is transitioning from an “aggressive” tighten cycle to a more gradual one. His comments came after Hungarian CPI accelerated to a faster-than-expected 9.5% (10.3% even for core inflation) and may have yet to peak at 10%+ by the end of Q3. It thus suggests the MNB stays patient rather than want to shock markets with sudden rate hikes. KBC Economics expect the one-week deposit rate to be raised to 7.5% by 2022Q3 and that the gap with the base rate gets closed by the end of June. Risks are to the upside (ie higher rates). Them materializing is dependent on several factors including fiscal policy, global central bank actions and the exchange rate. Regarding the latter, we think the MNB would like to see EUR/HUF fluctuating between 360-370. Since Virag’s speech, the forint weakened further from EUR/HUF 380 to 384.65 today.

Graphs & Table

EUR/HUF: forint ceding further ground as MNB signals ‘gradual’ approach despite further rise in inflation.

S&P 500: major equity indices looking for support after this week’s risk-off repositioning post US inflation data

Trade-weighted dollar holding at highest level since 2002

Oil regains $ 110 barrier as markets ponder impact of potential EU ban of Russian oil and uncertain demand from China.

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.

Register for a 2 week free trial today, pass a Growth, Venture or Rocket Tryout and get a funded prop trading account for upto $120,000.