Wednesday, 12 October 2022
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•          US (bond) investors returning from a long weekend didn’t help to restore a more constructive narrative on global markets. Eco data were few, with Thursday’s US September CPI release still the first important data reference on the agenda. Recession risk (IMF downgrading global economic outlook for 2023) only suggested more difficult times ahead for risk/growth sensitive assets. US equities closed from little changed (Dow) to additional losses of 1.1% (Nasdaq), with the latter touching a new cycle low, breaking below the 10.500 support area. The Eurostoxx50 lost 0.5%. The index stays above recent lows, but the picture remains worrisome too. Bad news still isn’t good news for bond investors either. Both US and German/EMU yields continue testing the cycle peak levels. The US and German 30-year yields even closed at new cycle top levels (respectively at 3.92% and 2.32%). The US curve steepened with yields closing little changed (2-y) to 6.6 bps (10-y) higher, as they still had some catching up to do. German yields eased between 2.5 bps (30-y) and 7.6 bps (5-y). At least for now markets didn’t build on Monday’s rumours that Germany/the EMU would consider additional funding on a EU level. Monday’s narrowing in intra-EMU spreads was partially reversed (10-y Italia/German spread + 8 bps). On FX markets, the dollar remains the by ‘default’ preferred haven even as gains yesterday remained modest. DXY closed at 113.22. EUR/USD finished little changed just north of 0.97. USD/JPY is drifting north of last month’s MOF intervention levels (USD/JPY this morning 146.25).
In the UK, the Bank of England is still facing an almost impossible balancing act. The Bank yesterday widened the scope of its emergency bond buying to inflation-linked gilts as the Bank saw pressure building in that segment of the market, too. BoE governor Bailey yesterday indicated the Bank still intends to stop the program as scheduled at the end of this week. However, overnight the Financial Times suggested that the BoE in contacts with banks left to door open for a prolongation. After a sharp decline late yesterday, sterling this morning is looking for a bottom (EUR/GBP 0.8827, Cable 1.1015). Even so, the extremely difficult BoE balancing act between policy normalization and preserving financial stability probably suggests more volatility ahead for UK markets.

•          This morning, Asian equity markets still mostly trade with modest additional losses, with Hong Kong underperforming. South Korea outperforms (0.3%). Later today, the eco calendar is thin (US PPI) on both sides of the Atlantic. Several ECB and BoE members will speak today. Markets will also keep a close eye at the Minutes of the September Fed meeting, even as Fed governors recently were quite unisono on the need for substantial further tightening. We expect core yields and the dollar to hold near recent elevated levels, further counting down to tomorrow’s US CPI release. In the UK, August monthly GDP (0.3%) and production data (IP -1.8% M/M) were substantially weaker than expected. The direct impact of the report might be limited, but it doesn’t help to provide comfort for UK bonds and/or sterling.  

News Headlines

•          The Bank of Korea raised its policy rate as expected by 50 bps, from 2.5% to 3%, the highest level since 2012. Two board members voted against the decision as growth momentum fades and with the property market under pressure. The Board sees continued rate hikes as warranted as inflation is expected to remain high and substantially above target. The BoK is also concerned about the weakness of the currency which adds to inflation woes. The won remains near lowest levels on record at USD/KRW 1430. Governor Rhee added that there’s a lot of disagreement over the pace of the November hike though.

•          US President Biden commented on recent OPEC+ production cuts in a CNN interview. He warned that there’s going to be some consequences for what they’ve done together with Russia. The so-called NOPEC bill which would allow US lawsuits against countries in the oil cartel for manipulating energy markets is one possible route. Halting US arm sales to Saudi Arabia for one year is another one. Any possible actions aren’t expected ahead of next month’s mid-term elections, but the President vowed to rethink the strategic relationship with Saudi Arabia.


The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. The correction end of September soon found support at the June high. Germany’s 10-yr yield is retesting the highest levels since 2011 (2.35%) with real rates driving the push higher.

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2008 (4.01%) and this level after a brief correction is again under test.

EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050. The YTD low stands at 0.9536

The UK government had to backtrack on part of its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency even as markets think that the BoE will have to counter fiscal support with additional monetary tightening.

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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