Wednesday, 8 June 2022
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•          Stock markets guided global trading yesterday in an emotionless session. European stock markets opened rather weak in line with WS’s performance on Tuesday and failed to overturn those losses throughout the day. They eventually closed around 0.75% weaker. The EuroStoxx50’s revival since early May is showing more and more signs of fatigue. The downbeat mood in Europe caused risk aversion, benefiting core bonds and the dollar. The German yield curve bull flattened with yields losing 1.6 bps (2-yr) to 4.9 bps (30-yr). US yield changes ranged from flat (2-yr) to -7.2 bps (30-yr). The intraday rebound in core bonds topped out during US dealings as risk sentiment improved after opening losses for WS. Main US indices eventually gained almost 1%. A similar dynamic was at play for dollar crosses. The trade-weighted greenback (DXY) tested first resistance at 102.73 during European hours, but improved risk appetite prevented a break during US trading hours. EUR/USD approached, but didn’t really test similar support at 1.0627/42. JPY is exception to the rule and remains in dire straits as the BoJ doesn’t want to leave its ultra-dovish line while the Finance Ministry doesn’t put its money where its mouth is. USD/JPY this morning changes hands above 133 for the first time since 2002. Resistance stands at 135.04 (2002 top). Sterling showed some erratic trading. EUR/GBP at first tested the recent tops near 0.858 following UK PM Johnson’s pyrrhic confidence vote victory, but eventually dived towards EUR/USD 0.85 by the end of European trading as risk sentiment started improving.
•          Today’s eco calendar is uninspiring. The OECD updates its economic outlook in what will be an echo to yesterday’s views by the World Bank (see headlines). Asian stock markets this morning are upbeat with China underperforming. Core bonds and the dollar lose some ticks. Overall, it will be a plain and simple countdown to tomorrow’s ECB meeting. Updated inflation forecasts will give the formal backing to the verbal turn made over the past couple of weeks, even if they are accompanied by softer growth prospects. ECB Lagarde in a blog post indicated that net asset purchases will end this month, setting the stage for a first rate hike in July and an end to negative policy rates by the end of the third quarter. That wording leaves open the option of accelerating the tightening cycle from an inaugural 25 bps rate hike to 50 bps hikes from September. Markets discount a cumulative 125 bps rate hikes for the four policy meetings in H2 2022. The ECB is also rumoured to strengthen its commitment on preventing fragmentation during its normalization cycle by announce a new bond buying programme if needed to counter borrowing costs for the likes of Italy should they spiral out of control.

News Headlines

•          The World Bank slashed global growth estimates further, from April’s 3.2% estimate to 2.9%. At the start of the year, the institution had penciled in 4.1%. It warned for several years of above-average inflation and below-average growth, with potentially destabilizing consequences for low- and middle-income economies. Many countries will find it hard to avoid a recession and even if a global one is avoided now, stagflation pain could persist for years, President Malpass said. The World Bank is concerned that such a scenario may require an even steeper-than-anticipated monetary policy tightening to bring inflation back to target. It compared the situation to the 70s and 80s, where rising global borrowing costs and exchange-rate depreciations in turn triggered financial crises.
•          Hungarian finance minister Varga submitted the government’s 2023 budget bill to lawmakers yesterday. The goal is to strengthen military defence and protect the regulated price scheme for households, he said. Expenditures of HUF 842bn are earmarked for the former and HUF 670bn for the latter. Part of that will be offset by revenues from a windfall tax on the energy sector, mining royalties, and sectoral taxes on telecommunication companies, insurers and payments by financial institutions. The budget targets a deficit of 3.5% and a year-end debt ratio of 73.8%. Growth and inflation are assumed at 4.1% and 5.2% respectively. Any extra budget revenue generated by GDP growth over the 4.1% assumption must be used to reduce the deficit.


Real yields took over from inflation expectations in pushing the German 10-yr yield beyond long term resistance at 1.13% (2012 & 2013 bottoms) to 1.24% (38% retracement on 2008-2020 decline). The next technical reference are 1.9% (50% retracement) to 2.09% (2013 high). The ECB finally turned the corner in its inflation narrative. The central bank will end net asset purchases this month, facilitating rate hikes from July.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. Quantitative tightening has started and will hit max speed by September. Growth worries triggered a small correction in May, but first support at 2.72% stood strong. Resistance stands at 3.2% (YTD high) to 3.26 (2018 high).

EUR/USD tested the 2017 low at 1.0341 which survived. The pair regained 1.0636 mostly on dollar fatigue. It does serve as a first sign of easing downside momentum, especially with the ECB finally trying to regain credibility by picking up the inflation battle. Downward trend nevertheless remains in place. Taking out 1.0806 is necessary to turn the picture neutral.

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. Open division within the BoE and the limited room for further tightening pushed EUR/GBP towards 0.86. A sustained break would be a bad omen for sterling.

Calendar & Table

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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