Monday, January 31, 2022

Daily Market Overview

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• Spanish January inflation numbers and German (regional) data soon sent the same message: European inflation won’t fall back as much as thought at the start of the year. The Spanish setback, related to a sharp rise in the electricity bill in January last year, was compensated for by rising core prices such as food and utilities. Downward tax-related German price pressure was partly offset by soaring energy prices and rising costs of services. Spanish and German national readings (EU harmonized) came in at respectively 6.1% Y/Y (from 6.6% vs 5.5% expected) and 5.1% Y/Y (from 5.7% vs 4.3% expected) and pose significant upside risks to Wednesday’s EMU reading. Consensus currently expects an easing from 5% Y/Y to 4.4% Y/Y. Simultaneously, it makes it harder for the ECB to defend its very accommodative monetary policy stance at Thursday’s policy meeting. We nevertheless only expect a U-turn to the ostrich politics in combination with updated inflation forecasts (i.e. March the earliest). Bond markets side with the view that the ECB will forced to acknowledge the inflation problem sooner than later. Today’s price action is testament to that view. German Bunds underperform US Treasuries and UK Gilts. German yields add 7.7 bps (3-yr) to 5.6 bps (30-yr) in a gentle bear flattening move. The German 2-yr yield moved above -0.55% for the first time since March 2019. Key resistance stands around -0.50% which are the 2018/2019 tops. A move above means the highest German 2y rate since January 2016. The German 10-yr yield returned to positive territory. Important resistance kicks in at 0.15% which is 62% retracement on the 2018/2019 decline. The European 10-y swap rate posts a new recovery high at 0.47% with similar resistance at 0.59% (62% retr.). European money markets keep pulling forward expectations on positive 3-month Euribor rates to currently around March next year. 10-yr yield spreads vs Germany narrow by up to 5 bps for Italy after President Mattarella was re-elected, thereby keeping PM Draghi in charge of the fragile government of national unity and avoiding a snap poll in the key reform year 2022. The US yield curve bear steepens today with yields rising by 1.9 bps (3-yr) to 4.3 bps (30-yr). The euro slightly benefits against the dollar and sterling from today’s front end interest rate support. EUR/USD currently changes hands just below the 1.12 handle, coming from an open near 1.1150. EUR/GBP rises from the low 0.83-zone towards 0.8330. European stock markets started on a strong footing, but gradually returned gains as the sell-off on bond markets intensified. Main indices currently trade near Friday’s closing levels. Losses/gains for main US benchmarks at the start of trading vary between -0.3% (Dow) and +0.9% (Nasdaq). Brent crude extends its steep march since mid-December, to currently trade above $91/barrel. The stalemate in the Russia/Ukraine conflict remains.
News Headlines

• The IMF’s financial counsellor and head of the monetary and capital markets department Tobias Adrian warned cryptocurrencies are causing “destabilizing” capital flows in emerging markets. Adrian said it is posing ‘immediate and acute risks” with crypto being used to replace traditional, existing currencies (“cryptoisation”). He also flagged the closer correlation between the performance of cryptos and other financial assets in developed countries. IMF officials believe that significant crypto selloffs are increasingly feeding into stock markets. It urged global regulators start building a consistent supervisory framework.
• US 30y mortgage rates trade at their highest since the early days of the pandemic. The average bank rate currently stands at 3.74% vs the all-time low at 2.82% in February 2021. It is also a steep increase from the 3.27% just one month ago. MBS have been underperforming USTs lately, pushing spreads substantially higher too. Mortgage rates are generally rising as the Fed prepares to normalize its policy. One of the steps includes reducing the $2.7tn big mountain of mortgage backed securities, almost double the amount compared to before the pandemic.

Graphs & Table

German 10-yr yield returns above 0% on higher inflation readings and going into the ECB meeting

Italian spread vs Germany narrowed by 5 bps after president Mattarella was re-elected President

EUR/USD: single currency benefits from rising interest rate support at front end of the curve

EUR/CHF: stronger euro relieves some (intervention) pressure off the SNB

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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