Monday, 23 May 2022
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•          On Friday, markets closed a volatile week in a calm fashion. China reducing the 5-year Prime Loan Rate more than expected gave some comfort that authorities still have some ammunition left to address the  economic slowdown. At the same time, it’s evident these measures won’t solve the broader threat of a global cost of living crisis, persistent supply chain issues and other central banks trying to engineer the difficult balance of a soft landing while trying to arrest runaway inflation. European, and to a lesser extent, US equities tried to regain part of the losses recorded earlier last week. However, it would be an exaggeration to label the move as an outright risk rebound. US equities closed little changed to marginally lower (Nasdaq). Technical factors were also in play. The S&P 500 tested bear market territory (-20% from January top and the 38% retracement of the post-pandemic rebound). Both levels survived in the close, but the battle continues. European indices at the end also only preserved a gain of 0.45% (EuroStoxx 50). Interest rate markets showed a mixed picture. The US curve bull flattened with yields declining 2.7 bps (2-y) to 6.3 bps (30-y) mainly driven by lower inflation expectations. German yields eased between 3.7 bps (5-y) and 0.5 bps (10-y) while the 30-y rose 4.6 bps. Uncertainty on economic growth further down the road is keeping interest rate markets in a (ST) consolidation pattern after the previous steep rise in yields earlier this year. The dollar remains strong, but stays away from the cycle peaks reached mid-May. DXY gained marginally (close at 103.15). EUR/USD (close 1.0564) lost a few ticks despite growing consensus on an ECB July rate hike and a mild risk-on. USD/JPY gained marginally (close 127.88). Sterling profited from better than expected UK April retail sales (EUR/GBP close 0.8456 from 0.8487) and signs from BoE governors earlier last week that the BoE will have to raise rates further, even if this is highly uncomfortable given the poor growth outlook.

•          This morning, Asian equities are trading mixed with Japan outperforming, but China underperforming. A further rise in Beijing Covid cases fuels speculation on further lockdowns with negative impact on growth. US and European equity futures apparently prepare for a corrective rebound. (futures are gaining about 1.0%). Later today, German IFO business confidence is expected to ease from 91.8 to 91.4. However, tomorrow’s PMI’s probably will be more important for markets. US yields already reversed an important part of Friday’s decline. Even so, we expect more sideways trading as interest rate markets look out how CB’s will react to further signs of cooling in economic activity. The dollar also continues its correction. DXY (102.69) nears the 102.35 support. EUR/USD is testing the 1.06 area. A sustained rebound north of 1.0642 would be a first sign that downside pressure is easing. In an interview with Dutch television this weekend, ECB’s Lagarde again suggested an ECB rate lift-off in July (starting a few weeks after ending APP) but downplayed the chances on a 50 bps hike as was suggested by Dutch ECB Member Knot last week.

News Headlines

•          Rating agency S&P Global reaffirmed South Africa’s rating at BB-, three notches below investment grade but raised the outlook from stable to positive. S&P Global warned that rising inflation and global monetary tightening could accelerate foreign portfolio outflows. However, recent structural reforms, contained fiscal expenditures and favorable terms of trade (leading to a net external creditor position) along with a flexible currency and deep capital markets will help mitigate those external risks, S&P added. The South African rand strengthens in a first reaction this morning though there’s at least as much general dollar weakness involved. USD/ZAR trades around 15.80.

•          Australia’s center-left Labor Party ousted now-former PM Morrison’s conservative coalition at Saturday’s general election. The new prime minister, Albanese, was sworn in during a short ceremony today even as the tally has not yet been concluded. Albanese is expected to fly out to Japan later on Monday to have one-on-ones with some of the country’s most important partners, including the US, India and Japan. It is currently unclear whether Labor has secured a majority in the 151-seat House of Representatives or if it will have to work with newly-elected minor parties and independent lawmakers. AUD/USD extends its recent bottoming out this morning, also on general USD weakness. The pair moves closer to the 0.71 big figure.


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 still high, are correcting lower from record highs. The worrying growth outlook complicates the picture and triggered a first meaningful correction since the start of the Russian invasion. Support at 0.80% stood firm.

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, 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. The Russian war in Ukraine plays in the euro’s disadvantage as well. The pair regaining 1.0642 would be a first sign of easing downside momentum.

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 temporary 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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