Wednesday, October 26, 2022

Daily Market Overview

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• Last week’s Fed comments/press rumours suggesting that the Fed might debate a slowdown of its 75 bps rate hike pace from December were a good enough reason for markets to adjust positions after US and EMU yields touched multi-year highs. A 75 bps hike at tomorrow’s/next week’s ECB & Fed policy meetings is still considered a done deal. However, both US and EMU markets now are positioned more or less ‘indifferent’ on chances for a 50 or a 75 bps additional step in December. We still favour the latter option, but markets are looking for more concrete ECB/Fed guidance. The, albeit very modest, ‘reassessment’ on potentially lower cycle peak ECB & Fed policy rate levels also translated into lower rates at longer maturities. After this week’s correction, interest rate markets gradually are looking for a short-term equilibrium. US yields today declined another 3 (2-y) to 8 (30-y) bps. With the ECB still some further to go to bring its policy rate to a neutral level, the decline in German yields came to a halt. Yields are rising between 2 bps (2-y) to unchanged (30-y). Changes in swap yields are close to non-existent (about 1 bp across the curve). Eco data with market moving potential were few. The UK yield curve steepens with the 2-y declining 12 bps, but the 30-y rising 4 bps. The UK government confirmed it will delay its fiscal statement from October 31 to November 17. So, the BOE won’t have a detailed plan on the new government’s fiscal intentions when it meets next Thursday. Equities don’t profit any further from the ongoing mild/less hawkish interest rate environment as a series of disappointing results from (US) tech bellwethers capped the recent rebound. The results also are an indication of growing risks of a US slowdown. A European recession was already well documented by recent data evidence, allowing some outperformance of US Treasuries over European bonds on growing signs of cyclical weakness. The EuroStoxx50 is losing 0.5%. The S&P (-0.5%) and the Nasdaq (-1.7%) open in red. The Dow gains modestly (0.2%).

• Despite a less buoyant risk sentiment, the dollar stays in correction modus as US yields are easing further. DXY tested neckline support near 110 (currently 110.4). EUR/USD (temporarily?) surpassed resistance a near parity (currently 1.001). USD/JPY also drifts modestly lower (147.25). The UK government delaying the presentation of its economic plan didn’t prevent a further sterling outperformance both against the dollar (cable 1.155) and the euro (EUR/GBP 0.866). In CE, the National Bank of Poland and the Hungarian central bank tightening liquidity causes a further short-squeeze in the zloty (EUR/PLN 4.75) and the forint (EUR/HUF 408). Hungarian EU minster Navracsics was also quoted that the country will meet EU demands to unlock EU funds.
News Headlines

China’s yuan surged the strongest on record today. The currency was hugely underperforming over the previous days following a leadership reshuffle during Communist Party Congress. The offshore yuan hit a record low while the onshore currency traded at the weakest levels since 2008. But a broader dollar correction as markets pare Fed hiking bets comes to the rescue. Sources told news agency Reuters also that major state-owned banks were spotted selling dollars in onshore and offshore markets in late trading yesterday to stabilize the market, adding that it is unusual for China’s big banks to be active in onshore trades during London or NY trading hours. It has put investors on notice. USD/CNH (offshore) declines from today’s high of 7.34 to 7.20 currently. The onshore pair, USD/CNY eases from around 7.30 to 7.17.

• Democratic Senator Brown, who plays a key role in overseeing the Federal Reserve as head of the Senate Banking Committee has sent Fed chair Powell a letter, asking him not to “forget your responsibility to promote maximum employment and that the decisions you make at the next FOMC meeting reflect your commitment to the dual mandate”.  It comes one week before the central bank is seen rising rates with another 75 bps as it fights sky-high inflation. Brown says the current labour market must be avoided to be overwhelmed by the consequences of the aggressive inflation campaign, “especially when the Fed’s actions do not address its [inflation] main drivers”. The US also stands at the eve of the midterm elections on November 8. Democrats are struggling to avoid losing (partial) control of Congress with price pressures still elevated and the Fed’s tightening effects starting to ripple through.

Graphs & Table

EUR/USD escapes downtrend channel and tries to hold north of parity. To be confirmed.

US 10-y yield near first support at 4.0%.

Nasdaq declines after recent rebound as US tech results might be a harbinger of cyclical downturn.

GBP/USD: sterling remains well bid as government signals an in- depth reassessment of its economic plan by 17 November

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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