Monday, 26 September 2022
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•          UK (core?!) bonds got an incredible beating on Friday. Markets didn’t take the country’s borrowing and spending spree as presented by Min Fin Kwarteng well. Risk premia (gaping deficits) as well as BoE tightening bets sharply rose, leading to yield changes of a whopping 43.3 bps at the short end of the curve and 26.9 bps further out. Money markets expect a terminal policy rate near 5.5%, 100 bps more than just one week ago. European bonds were caught in the slipstream, unhindered by slightly weaker-than-expected PMIs. Swap yields surged 0.6 bps to 13.4 bps in a flattener, further inverting the curve. The 2y yield touched the 3% mark for the first time since 2008. US yields added 8.3 bps in the 2y tenor. Longer maturities again lost a few bps. The sharp repricing triggered an equity sell-off. The EuroStoxx50 set a new 2022 low (3348). The S&P 500 narrowly prevented a close below the June troughs. Needless to say that sterling was the biggest loser in FX. EUR/GBP skyrocketed from the low 0.87 area to 0.893, the highest since early 2021. Cable dropped four full big figures to 1.086. EUR/USD tanked from 0.984 to just south of 0.97 as it went into Italian election weekend. Signs of nervousness were visible in the Italian/German spread (+11 bps).
•          Kwarteng in a BBC interview yesterday said that when it comes to tax cuts, “there’s more to come”. His comments spark a huge rout in the pound amid thinner trading. EUR/GBP briefly shot up to 0.927 before paring gains to 0.911 currently. GBP/USD hit an intraday low of 1.035, temporarily losing the 1985 support level at 1.0520. There’s market talk of an in-between BoE emergency meeting, just two days after its regular one. The euro isn’t feeling well either, especially against USD, following the Italian election result. The right-wing coalition consisting of Brothers of Italy, Forza Italia and League are projected to secure 114 seats in the Senate, where 104 are needed for a majority. Meloni (BoI) is on track to become the first female Italian prime minister. She attacked the EU in her days as an activist. Although she moderated the tone, markets remain on edge. It’s also unclear still whether Meloni will deviate from Draghi’s reform plan, potentially hampering EU fund flows. For a moment, EUR/USD slipped below 0.96, testing the lower bound of the downward trend channel and the 2001 support. Asian currencies including JPY and CNY (see below) are under pressure too. Today’s eco calendar is packed with central bank speeches with ECB’s Lagarde appearance before the Committee on Economic and Monetary affairs as the highlight. If anything, they are only to support the ongoing moves on markets, i.e. higher core bond yields, stronger dollar and weaker equities.

News Headlines

•          The People’s Bank of China will impose a risk reserve requirement of 20% on banks’ foreign-exchange forward rate agreements with clients. The measure aims to stabilize foreign exchange market expectations and to strengthen macro prudential management. De facto, the measure is raising the cost of buying dollars via forward contracts which should support/ease pressure on the yuan. The CNY continues to lose further ground this morning against a broadly stronger dollar. USD/CNY trades at 7.164 and is nearing the 2019 top of 7.1876. A break above that level would bring the Chinese currency to the weakest level since 2008. The finance minister of South Korea indicated that the government is preparing more measure to stabilize the foreign exchange market after it secured a currency swap agreement with the Korean Central bank and a pension fund on Friday. The finance minister left open the option of a currency swap deal between the Bank of Korea and the Fed, but indicated that it isn’t necessary yet. USD/KRW currently trades at 1434, the weakest level for the won since 2009.

•          According to property website Rightmove, UK house prices rose further by 0.7% M/M to be up 8.7% Y/Y (was 8.2% in August). Rightmove also indicated that Friday’s announcement of  UK Chancellor of the Exchequer Kwasi Kwarteng to cut the stamp duty on home buyers is likely to simulate demand further.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike and a 75 bps follow-up move. A similar-sized move in October is in the cards. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June and took out the YTD high at 1.93%. In case of a sustained break, 2.56% serves as the next reference.

After three 75 bps rate hikes, the Fed moves into (modestly) restrictive territory, but more rate hikes are needed to slow aggregated demand. After a sharp correction this summer, the 10y breaks beyond the 3.50% barrier. With the Fed signalling a prolonged period of restrictive policy, next targets at 3.76% and 4.0% are on the radar.

EUR/USD is in a strong downward trend channel since February. A hawkish ECB bought the euro some time. Still the dollar remains the main beneficiary of rising US (real) yields combined with a persistent risk-off context. Geopolitical tensions and the risk of a recession also don’t help the euro. The break below 0.9864 opened the way 0.96 support area (2001 interim high).

The Bank of England hiked by 50 bps in September but risks falling behind the curve with lavish fiscal support. Markets aggressively repositioned in response. Sterling is unable to profit from this increased rate support though with attention going to yawning deficits. EUR/GBP skyrocketed above 0.90. Sterling’s faith is sealed.

Calendar & Graphs

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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