Tuesday, 6 September 2022
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•          Energy stayed the dominant trading theme on European markets yesterday. Gas prices surged as much as 36% intraday before the panic subsided somewhat. Eventual gains for natural gas amounted to about 15%. Oil prices also rose with OPEC+ having decided to cut production by a (symbolic) 100k barrels a day in October. Brent oil advanced from $93/b to $95.74. Fearing a sharp recession, stocks sold off. The EuroStoxx50 dropped 2.6% before paring losses to about 1.5%. Core bonds remained under pressure nonetheless. Rising energy prices deteriorate an already dramatic inflation outlook even further, solidifying the case for aggressive/frontloaded monetary tightening. European swap yields jumped 9.5 bps (10y) to 11.9 bps (5y). The euro washed off most of the early, knee-jerk weakness. EUR/USD finished only marginally lower at 0.9929 – a new two-decade closing low nonetheless. Liz Truss was announced as the new Conservative Party leader and prime minister in the UK but didn’t spark a material market reaction in the pound. After a volatile Asian session, the British currency steady strengthened against the euro after having slid over the past ten days. EUR/GBP reversed course from the high 0.86 area to end up at 0.862, in line with risk sentiment gradually turning a bit for the better. Sterling did notice a Bloomberg story overnight which reported Truss earmarking a whopping £130bn over the next 18 months to keep UK energy bills at the levels of today. Bills were due to jump 80% in October. It’s a short-term positive by protecting household’s purchasing power. Sterling tested EUR/GBP 0.86 resistance this morning. Cable (GBP/USD) rebounded from the 1.15 barrier. Other news this morning includes the Reserve Bank of Australia’s expected 50 bps rate hike to 2.35%. The RBA expects more tightening further out but reiterated it is not on a pre-set path. Data-dependency is the codeword these days. China’s RRR cut yesterday is of little support for the yuan. USD/CNY extends a rise to 6.94. USD/JPY hits a new 24-y high just shy of 141. EUR/USD ekes out an advance, surpassing 0.995. Equities trade mixed and core bonds decline further. UST cash trading reopens today with yields adding 6.8 bps at the front end of the curve.

•          Today’s remaining economic calendar contains the US services ISM. Consensus expects a further but limited easing to a still-solid 55.4. Combined with US Treasuries having some catching up to do with European bonds, we think the dollar may continue to enjoy the benefit of the doubt, especially in this structurally uncertain environment. EUR/USD’s downside continues to look vulnerable. A break below 0.99 was avoided yesterday, but the pair isn’t out of the woods yet. Sterling enjoys a small relief rally after the new PM was announced. This may last for the time being but we are wary of Truss’s fiscal policies that may widen the twin deficits going forward.

News Headlines

•          The Hungarian government yesterday took steps to meet conditions to free up blocked EU funds. Prime minister Orban signed a decree to set up and independent anti-corruption agency. The new authority is designed to ‘intervene in cases where it considers that the authorities responsible have not taken the necessary steps to prevent fraud, conflict of interest, corruption and other illegalities or irregularities which could harm the sound financial management of the EU budget’. The government also announced the creation of an anti-corruption task force consisting of equal number of government representatives and non-government members. The forint yesterday weakened back above the EUR/HUF 400 mark due to uncertainty on the European energy crisis. The prospect of the country working on an agreement with the EU might be supportive for the currency.

•          According to sources referred to by Bloomberg news agency, the German debt agency is talking with market participants set up reverse repo transactions potentially exchanging cash for government securities. This would help the agency to avoid putting cash at its Bundesbank account at a rate that is likely to be lower than market levels as the ECB is raising interest rates above 0%. Governments changing their cash-management policies by putting cash into short-dated, high quality assets might raise demand for these assets, driving up the premium compared to the swap market. According to Bloomberg reporting, the Treasury of Austria is also considering actions to reduce its cash position.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway. Even a 75 bps hike is on the table at the September meeting. Germany’s 10-yr yield broke out of the corrective downward trend channel mid-August. Forceful return action higher since then met some resistance around the 1.50% zone.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hit max speed in September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back on central bank frontloading to tackle inflation.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments at Jackson Hole and the simultaneous sell-off in bonds & equities pushed the euro to new lows below parity. This year’s downward trend channel and failure to leave YtD lows behind suggest more downside.

The Bank of England hiked by 50 bps in august. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP finally broke out of the corrective downward trend channel since mid-June but is running into resistance in the high 0.86 area. Meanwhile, the new UK PM Truss announced power purchasing measures that may support sterling ST.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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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