Monday, 16 May 2022
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•          Markets ended a volatile week in peace last Friday. Main European and US equity indices recovered 2% and more though technical pictures remain heavy, screaming sell-the-uptick. The core bond corrective short squeeze grinded to a halt as well. German Bunds underperformed US Treasuries in the process. The US yield curve bear steepened with yields adding 2 bps (2-yr) to 8.3 bps (20-yr). The German curve moved in a similar way with yield rises varying between 5.7 bps (2-yr) and +10.7 bps (10- & 30-yr). Peripheral yield spreads vs Germany widened by up to 3 bps for Italy. EUR/USD made a second attempt to really test the 2017 low of 1.0341, but 1.0350 turned out to be the intraday floor. Succumbing that 2017 low suggests a return to parity from a technical point of view. EUR/GBP closed below 0.85 for the first time since that BoE-meeting even if UK PM Johnson will this week sign off on plans to unilaterally scrap parts of the brexit deal (NI protocol). He risks triggering a trade war with the EU that way.
•          Risk sentiment gets a small dent this morning following disappointing monthly Chinese data. April production figures (-2.9% Y/Y & 4% YTD Y/Y), retail sales (-11.1% Y/Y and even -0.2% YTD Y/Y) and investments (6.8% Y/Y) all cooled significantly and printed sub-consensus. The jobless rate jumped up form 5.8% to 6.1%. The activity data show the cost of the zero-covid policy currently conducted in Shanghai and parts of Beijing. Policy makers are in the meantime stepping up economic support with the PBOC this weekend lowering the lower-bound range of mortgage rates for first-time homebuyers from 4.6% to 4.4%. The central bank this morning did leave its 1-y MLF-rate unchanged at 2.85% with some hoping for a modest decline. On a slight bright note, the city of Shanghai will gradually lift some of the restricting Covid-measures as no cases outside quarantine were reported this weekend. Local markets take the pessimistic view (worse Chinese slowdown & PBOC could have done more) with Chinese bourses underperforming regional peers (up to -1%). USD/CNY remains close towards last week’s high near 6.80. The US Note future spiked higher, but the move lacked real follow-up action. On commodity markets, wheat prices spiked by their maximum daily amount after India (number 8th exporter) decided to suspend overseas sales.
•          Today’s eco calendar is empty apart from the US Empire Manufacturing survey (May). The EC updates its economic forecasts. It is expected to show downward GDP and upward inflation prognosis. Speeches by central bankers remain a wildcard. Overall, we think calm could be restored following last week’s corrections.

News Headlines

•          German chancellor Scholz’ Social Democrats suffered painful loss at yesterday’s regional elections in North Rhine-Westphalia. The SPD scored their worst-ever result of about 27% (vs 31.2% in 2017) in the country’s industry-heavy and most populous state. The CDU won 35.9% of the votes (vs 33% in 2017) while the Greens’ share tripled to 18.1%. Both are expected to form a local government instead of the current CDU-FDP coalition. Sunday’s elections were seen as a test for Scholz and his federal government consisting of the SPD, FDP and Greens. The chancellor’s ratings have declined in the latest months over his handling of the war in Ukraine.
•          Finland and Sweden have announced they will apply for Nato membership in the coming days. For the latter, this means abandoning about 200 years of wartime neutrality. The applications are a consequence of Russia’s invasion in Ukraine and will change European geopolitics significantly. Both the Finnish and Swedish parliament are expected to approve the move today. Admission to the Nato club requires unanimity. Turkish president Erdogan recently objected, citing the Nordic country’s support for the PKK which Turkey classifies as a terrorist organization. But Nato secretary-general Stoltenberg said he was confident this would not be an issue. Russia is opposed to the move and threatened with “serious military and political consequences”.


The ECB will end net asset purchases in June. A first rate hike is likely in July (or even June?!). Speculation has caused real yields to bottom out. Inflation expectations, while stile high, are correcting lower from record highs. The jury is still out, but a correction in nominal yields may be in the making. 0.80% serves as first support.

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 will start in June and hit max speed from September onwards. But the recent yield surge this caused as markets adjusted, has eased recently. Yields may be entering a period of consolidation. Important support is located at 2.72%.

EUR/USD lost the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggesting a return to the 2017 low at 1.0341. Even president Lagarde finally caving for a July rate hike couldn’t lift the euro’s spirits. Too little, too late?! Russian war in Ukraine plays in the euro’s disadvantage as well.

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 doubt starting to filter through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP above the 0.8512 level. A sustained break would be a bad omen for sterling.

Calendar & Table

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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.
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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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