• Weak European risk sentiment spilled into US dealings with losses of up to 2% for European indices and up to 1.3% for the US. The only silver lining is that they managed to close off intraday lows. Looking at it from a technical point of view, the EuroStoxx50 tested the 3400-area which serves as key support, amongst others in a closing triangle pattern. Losing that area suggestd a return towards 62% retracement on the 2020/2021 rally at 3110. The S&P 500 remains in a sell-on-upticks pattern as well. Any rebound potential probably reaches to 4017, but short term a return to the 3675 YTD low seems more likely. US May personal income and spending figures drew attention during yesterday’s market spasm. Spending disappointed at 0.2% M/M with a significant downward revision to the May number from 0.9% M/M to 0.6% M/M. Adjusted for inflation, real spending fell (-0.4% M/M) for the first time this year. The faltering consumption momentum doesn’t bode well for H2 growth, tilting the market balance against towards the growth part of the equation (instead of the accelerating inflation). Core bonds faced another short squeeze with end of quarter flows possibly adding to the moves. German Bunds massively outperformed US Treasuries. German yields lost 12.3 bps (30-yr) to 21.9 bps (5-yr). The German 10-yr yield closed at last week’s low of 1.34%. Corrective potential drags towards 1.19% (previous top May)/1.15% (38% retracement on YTD move). The EU 10y swap arrived in similar fashion at last week’s low of 2.15% with downside references at 2% (May top) and even 1.71%. Daily changes on the US curve varied between 3.5 bps (30-yr) and 10.4 bps (5-yr). The US 10-yr yield closed below first support at 3% with the important reference being 2.71%. Relative yield dynamics and the risk-off climate pulled EUR/USD temporary below the 1.04 big figure, though the single currency managed a nice and unexpected rebound during the US trading session. The pair eventually even closed with an intraday gain (1.0484 from1.0442). EUR/GBP followed the these swings, closing above 0.86 from a dip around 0.8550. The upward trend channel since mid-April remains in place. Commodities continues their correction lower as well yesterday with the CRB index ending 2.75% down at its lowest level since mid-March and clearly showing signs of rolling over after a strong upward trend. Today, we might see an interplay between eco data and risk sentiment to direction trading. The former could amplify losses for the latter. June EMU inflation numbers and June US manufacturing ISM are due. German inflation data could have a temporary dampening impact on the EMU number, but the trend remains firmly higher. The ISM will probably extend this year’s slide despite the May uptick. Core bonds and the dollar should get the advantage.
• Sentiment among large Japanese manufacturers deteriorated more than expected as China’s lockdowns and intensifying growth slowdown fears weighed. The Q2 Tankan current assessment indicator fell from 14 to 9, the lowest since 2021Q1. The outlook improved only very marginally, from 9 to 10 but less than the 13 expected. On the other hand, the services sector across small and large firms enjoyed some relief since the lifting of the Covid curbs early in the second quarter, be it less than hoped-for. Separate Japanese data showed June headline inflation in the capital city easing from 2.4% to 2.3% as subsidies kept a lid on energy price gains. But both core measures quickened. Tokyo inflation excluding fresh food rose from 1.9% to 2.1%. Stripping out fresh food and energy, prices rose by 1% (0.9% in May). The Japanese yen strengthens this morning to USD/JPY 134.87. The move has more to do with risk sentiment though.
• The EU and New Zealand have concluded a free trade agreement. The deal eliminates all tariffs on EU exports to the country and improves access to meat and dairy products as well as food and vegetables. Some 97% of New Zealand’s exports will enter the EU tariff free and could cut about €140mln per year in duties for EU companies. EU trade commissioner Dombrovskis lauded the unprecedented provisions on sustainability and labour rights. Both sides could impose sanctions against each other for any breach of the Paris climate agreement. The deal took four years and nearly sank on negotiations over agricultural products. It is expected to be signed next year.
The ECB finally turned the corner in its inflation narrative. The central bank ends net asset purchases this month, facilitating rate hikes from July. Real yields took over from inflation expectations, pushing the German 10-yr yield to its highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower. The uptrend remains firmly intact.
The Fed started tightening and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hike in July is likely. Quantitative tightening will hit max speed by September. Anticipation on even faster Fed tightening pushed the 10-y yield to a new multi-year high of 3.5%. Short-term correction is in store with 2.72% marking a firm bottom.
EUR/USD tested the 2017 low at 1.0341 which survived. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. However, the 1.0806 resistance still proved one step too far, even as the ECB formally announced to start hiking rates as inflation stays unacceptably high. Range-trading ahead.
The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. The BoE in June signaled it might step up tightening, but it is unsure whether this will change fortunes for sterling. EUR/GBP 0.8721 is next resistance
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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