Tuesday, May 17, 2022

Daily Market Overview

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• Market sentiment is subject to quite some wild swings. Last week, investors panicked that aggressive CB (especially Fed) rate hikes to address elevated (core) inflation would inevitably slow growth, triggering a sharp risk-off correction annex decline in core bond yields. Both factors currently are again moving the opposite way. Equities, European indices in particular, are rebounding. The Eurostoxx50 today gains another 1.4%. US indices open up to 1.9% higher (Nasdaq). We see this mainly as a corrective rebound. Recent eco data were mixed. Today, US April retail sales were much stronger than expected with core/control group sales rising 1.0% M/M and with March sales sharply upwardly revised. However, US consumer confidence (Friday) and the Empire manufacturing (yesterday) recently missed consensus by a wide margin. Whatever, markets see the glass again half full rather than half empty. Despite a mixed outlook on growth, central bankers reiterate that they can’t but give priority to prevent a de-anchoring of inflation expectations. This was one of the key take-aways from yesterday’s hearing of BoE members before a Treasury committee. Their view was supported by solid UK labour market data and higher than expected wages published this morning. In EMU, Q1 growth was upwardly revised from 0.2% Q/Q to 0.3% Q/Q. This is a backward looking indicator and won’t change the ECB’s assessment in any profound way. Even so, it gives some comfort for ECB policy makers who cautiously joined the scenario of a July rate hike of late. Dutch ECB member Knot, a well-known hawk, estimated the time ripe to air the idea of 50 bps ECB step if necessary. Both in EMU and the UK, the curve bear flattens. German are rising between 13 bps (2-y, corrected for a benchmark change) and 9 bps (30-y). 10-y intra-EMU spreads hardly change, with Greece the exception to the rule (-7 bps). UK yields are jumping between 19 bps (2-y) and 10 bps (30-y). US bond markets outperform the UK and Germany with yields rebounding between 9 bps (5-y/10-y) and 6 bps (30-y). As said, panic on growth (temporarily) subsided. Inflation is again in focus. However, it wouldn’t surprise us to see new pockets of uncertainty on growth resurface in the (near) future. Later today, ECB’s Lagarde and Fed Chair Powell are still scheduled to speak.

• We haven’t seen it for a while, but FX markets today show a combination of both euro strength and a USD weakness, or at least correction. After a rejected test of the 105 area end last week, the DXY trade-weighted index (103.50) eases further. USD/JPY is the exception to the USD correction (129.75 from an open of 129.16). However, the risk-on and the comments from ECB’s Knot finally give the single currency some breathing space. The pair regains the 105 handle. To call off the downside alert EUR/USD needs to regain 1.0642 early May top. Sterling had a strong start this morning supported by solid labour market data including higher than expected wage growth. This supported BoE Bailey’s case to continue to raise rates, even given the risk for a sharp cooling of growth further down the road. EUR/GBP tested the 0.84 area. However, during the day, the euro strength also came in play. In addition, UK foreign Secretary Lizz Truss formally revealed UK plans to unilaterally change parts of the Northern Ireland protocol also didn’t help sterling. EUR/GBP currently trades again in the 0.8450 area.  

News Headlines

• Hungarian first quarter GDP was stronger than expected, printing at 2.1% q/q (1.5% expected), matching almost the upwardly revised 2.2% of Q4 last year. The economy is now 8.2% bigger in yearly terms. The flash reading only provides details on the sector level. All sectors contributed to the increase, the Hungarian statistical office said, but mostly industry and market services. The strong growth probably received a boost from PM Orban’s pre-election spending spree and may be unsustainable for coming quarters. Hungary’s forint strengthens today though that is at least equally as much inspired by the broad risk-on. EUR/HUF eases from near-record lows at 390 to 386.86. GDP in Poland added a lofty 2.4% q/q in Q1 to be up 9.1% compared to the same quarter last year. There are no decomposition tables available yet. The zloty appreciates in lockstep with other CE currencies. EUR/PLN drifts to 4.64, the lowest level since end April.

Graphs & Table

2-y swap resumes uptrend as growth fears abate, at least temporarily, and as ECB’s Knot floats the idea of a 50 bps hike.

EUR/USD rebounds off cycle low as markets grew more confident on ECB action in a not-that-distant future

EUR/HUF: forint rebounds, partially supported by strong growth, but mainly due to a better global risk sentiment.

EuroStoxx50: tries to leave the key 3400/3600 support area behind.

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).
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.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
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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