Friday, January 21, 2022

Daily Market Overview

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• European stock markets can’t escape the rot today. Main indices lose up to 2% and more. The EuroStoxx 50 trades below first support at 4231. A sustained break paves the way to the low 4000-zone. It will be a key session for US indices as well. They open around 0.5% weaker. The S&P yesterday closed below the neck line of a triple top formation at 4495. A sustained break lower gives more downward potential towards the October low of 4279 with the final target of the technical formation even at 4172. The threat in the Nasdaq is even larger. The tech index is already officially in correction mode given the 10%+ decline from the November top. The Nasdaq yesterday closed below the neckline of a huge double top formation (14175) which serves as resistance in H1 2021. A move lower suggests more downward potential towards 12552 (38% retracement since March 2020) and even the low 12 000 area (final target double top). The dominant reason for this year’s risk correction is obviously the surge in real rates because of the accelerated global push towards (central bank) policy normalization. Q4 earnings also start showing an impact of higher inflation via rising wage costs. Later this year, the impact from higher inflation and tighter monetary policies risks backfiring via more sluggish growth momentum.
• The more pronounced risk correction took over from the rising yields as being the dominant factor for other action on the market place. Core bonds are against better bid from a safe haven perspective even if oil prices remain upwardly oriented. US yields drop by 3.1 bps to 5.2 bps on a daily basis with the belly of the curve outperforming the wings. The German yield curve bull flattens with yields shedding 4.3 bps (2-yr) to 6.2 bps (30-yr). 10-yr yield spread changes vs Germany widen by 3 bps for Italy and 4 bps for Greece. The Japanese yen and single currency are again G4-outperformers in the risk off climate. USD/JPY loses the 114 handle with EUR/USD trading again more comfortable in the mildly upward sloping trend channel around 1.1350. Sterling is today’s underperformer. Losses for UK Gilts are in line with the ones in Germany, but the risk-off climate and this morning’s horrible December UK retail sales clearly spooked some GBP-investors. We think that the February BoE rate hike still stands. The dismal retail sales probably are an omen for worse to come. The UK cost-of-living crisis risks intensifying in Q2 with planned tax hikes and the lifting of the gas price ceiling. EUR/GBP is short squeezed higher from 0.8317 to 0.8369. Smaller and less liquid currencies like the CEE ones all pay the price for risk aversion today. CHF is the only one that outperforms EUR and even JPY. EUR/CHF nears the sell-off low at 1.0326.
News Headlines

US federal agencies are being instructed to up the minimum wage for government employees to $15 per hour, American news website Axios reports, based on a statement by the Office of Personnel Management today. Last year, the Biden administration also issued an executive order that raised wages of federal contract workers to $15 an hour. While the new OPM guidance only affects an estimated 70 000 federal employees, it carries important symbolic meaning in an environment where rising wages are becoming an ever bigger issue in the much larger private sector. Data from FactSet showed that up until January 14, 60% of the S&P 500 companies in their earnings calls said labour inflation and shortages either had a negative impact on bottom lines or are expected to have one in the future.
• Belgian consumer confidence slightly rose at the start of the new year. The headline indicator for the first time since October posted an increase, from -4 to -2. The improvement came thanks to better economic expectations       (-16 to -12) and less worries over the unemployment (from 12 to 6; a decline of the indicator is a positive). A less optimistic view on the financial situation (from 0 to -3) as well on the ability to save (from 12 to 10) over the next 12 months served as counterweights. This may reflect growing concern over inflation.


Graphs & Table

EUR/CHF: Swiss franc rules FX space in today’s risk aversion. Sell-off level in EUR/CHF (and SNB headache) within reach

VIX: expected volatility on S&P 500 surges. Today will be a key session. Giving up key support won’t bode well for the near future

German 10-yr yield corrects towards previous resistance at -0.07%

EuroStoxx50: break below near term support suggests more room for correction towards the low 4000 area

Data source: Bloomberg

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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