Wednesday, 19 January 2022

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•          The new paradigm that dominates trading since the start of the year simply continued as trading resumed post Martin Luther King Day. Markets ever more see inflation as an obstacle to growth rather than a result of healthy demand, raising speculation that the Fed will have to act sooner and more aggressive than anticipated until now. A further rise in oil due to geopolitical tensions add to that picture. Investors are also looking out for signs of cost pressures affecting corporate margins as the earnings season comes into full swing (cf Goldman results). Especially US yield markets ever more embrace the idea of further frontloading of Fed normalization (or will it be real tightening?). US yields yesterday jumped between 7.6 bps for the 2y, 10 bps for the 5y and 6.6 bps for the 30y. Despite the rise in oil prices, the move was almost solely due to a rise in the real yield component (10y +8.4bps). A mediocre US NY Fed empire manufacturing survey didn’t change the intraday dynamics. European yields initially tried to join the uptrend in USD markets but couldn’t hold to that momentum. The German yield curve steepened marginally with the 2y declining 0.9 bps and the 30y rising 1.4 bps. The 10y Bund yield this morning opens in positive territory for the first time since May 2019. The rise in US real yields continued to weigh on global equity markets with US indices underperforming (Nasdaq -2.60%, Dow -1.51%, Euro Stoxx 50 -1.03%). Last week, the sharp rise in US inflation triggered a temporary setback of the dollar. However, this apparently was nothing more than profit taking on overdue long positions. The dollar yesterday again profited from the rally in US (real) yields. The DXY TW index regained the previous neckline near 95.55. EUR/USD dropped below the top of the previous consolidation pattern (1.1386) to close the day at 1.1325. USD/JPY finished the day little changed at 114.61. So the yen held up well, even as the BOJ at its policy meeting didn’t make a big U-turn on its inflation assessment.

•          This morning, Asian equities join the sell-off from WS, with Japan underperforming (Nikkei -2.8%).In a briefing, PBOC Deputy Governor Liu Guoqiang indicated that the central bank will use a wide range of tools in order to support credit flows to the economy. The yen outperforms on the risk-off with USD/JPY drifting to the 114.25 area. The oil price extends its rise on headlines of an explosion affecting operations of a key pipeline between Turkey and Iraq (Brent $88/b). The US eco calendar contains the building permits and housing starts. EMU data are second tier. A risk-off sentiment currently is no good enough reason to slow the rise, especially in US yields. Even so, the pace of the move might slow as markets will look out for new guidance from next week’s Fed meeting. The technical picture for the dollar improves again. EUR/USD returned in the 1.1186/1.1386 trading range. UK CPI data published this morning mostly were higher than expected with headline CPI rising from 5.1% to 5.4%. The debate on a new BOE rate hike in February seems settled. EUR/GBP is holding near recent lows (EUR/GBP 0.8330).

News Headlines

•          Tory rebels in the UK sat down yesterday to discuss a no-confidence vote in PM Johnson. They claim to soon have the necessary 54 letters required to trigger such a vote. Johnson is under heavy pressure from both the opposition and (for now mostly internally) from his own party over the “partygate” scandal. In a bid to sooth increasingly frustrated Tories, Johnson will today announce the lifting of some Covid restrictions. These may include scrapping the work-from-home guidance and the use of Covid passes to attend big events. Sterling thus far remains immune for the political showdown. EUR/GBP yesterday even to a fresh 2022 low at 0.833.

•          Washington ups diplomatic efforts to de-escalate a building crisis with Moscow over Ukraine. Secretary of State Blinken will first meet Ukrainian president Zelenskiy and Foreign Minister Kuleba today. He will then travel to Berlin to discuss the matter with German Foreign Minister Baerbock and will later hold a “Transatlantic Quad”, involving the US, UK, France and Germany. On Friday, Blinken is due to meet with Russian Foreign Minister Lavrov in Geneva. On markets meanwhile, Russian assets are getting hammered. Bonds tanked, pushing yields in one month time 90 – 125 bps higher across the curve. The MOEX stock index stumbled more than 20% lower since hitting an all-time high in October last year. The rubble over that same period declined 8%. EUR/RUB trades around 87.23.


Long term EU bond yields sprinted higher end December after the ECB didn’t really commit to strong asset buying post-PEPP with a potential end by late 2022. Simultaneously, the impact of the Omicron wave seems manageable. The move was equally driven by higher real rates and rising inflation expectations. The break above -0.20% was followed by swift gains with a return to the symbolic 0%

The US 10-yr yield took out the October top at 1.7% and with the 1.80% 2021 high also broken. The Fed’s taper acceleration and hawkish message at the December meeting/minutes triggered a surge in real yields. A March rate hike and 2022 start of balance sheet reduction become the most likely scenarios.

The dollar fell prey to profit taking after December inflation data. EUR/USD was able to escape the 1.1186/1.1386 trading channel in place since end November. The pair for now failed to take out next high-profile resistance at 1.1495 as surging US real yields came to the greenback’s rescue.

EUR/GBP fell below the previous sell-off low at 0.8381 in the wake of the Bank of England’s first rate hike since July 2018. A positive risk environment supported GBP as well. UK Gilts underperform German Bunds with another rate hike by the BoE in February being our base case and granting the UK currency short term interest rate support. Next target: EUR/GBP 0.8282.

Calendar & Table

Data Source : Bloomberg

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

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.
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