Tuesday, October 18, 2022

Daily Market Overview

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• Most markets built on yesterday’s moves in a rather dull trading session today. European stocks (Eurostoxx 50) added another 1.8% after taking out a first resistance level around 3451 (July 2020 interim high) shortly after the open. US equities go even further gaining more than 2% after big, 3%+ gains yesterday (Nasdaq). The jury’s still out but such large, countertrend moves have an awful lot in common with bear market, aka sucker, rallies. US Treasuries trade choppy. US yields lost a few bps in Asian dealings. A recovery attempt in European dealings (US 10y briefly topped 4% again) failed quickly. German Bunds’ trajectory was simply a copy paste of that. It suggests that interest rate markets for the time being are in a consolidating mode as they await crucial input from the likes of the ECB next week and the Fed/Bank of England early November. Current yield moves range between -1 bps and -5.3 bps with the belly outperforming in the US. German bond rates in a trade a tight range between -2 and +2 bps. Moves in European swap yields are larger (-3.4 bps to -6.7 bps). UK gilts came under slight selling pressure after surging yesterday when the Bank of England said this morning’s FT report was in accurate. In it, the business newspaper said the UK central bank would further delay active gilt sales from its balance sheet beyond October. UK bond yield changes briefly turned positive but trade conviction was low and momentum faded quickly. The curve currently sheds up 3.1 to 6.4 bps at the middle and long segment. Economic data was limited to the German ZEW indicator, which came in mixed. Expectations marginally improved from lowest level since 2008 at -61.9 to -59.2 vs consensus fearing a further deterioration to -66.5. The current situation reading tumbled to the lowest since mid-2020 (-72.2).

• The dollar started on softer footing this morning and that remained the case for much of the session. For the trade-weighted index, this meant edging lower towards the lower bound of the upward trend channel. It came close to a test. DXY is currently narrowly losing the fight with the 112 barrier. EUR/USD ekes out a marginal gain but is still some way of first meaningful resistance at 0.995. The British pound already gives back part of the gains following the UK government’s embarrassing U-turn. EUR/GBP settles above 0.87. Cable (GBP/USD) has a generally softer USD to thank for limiting losses. The pair is hovering around opening levels of 1.133. The kiwi dollar is the notable outperformer in the G10 area today. This morning’s Q3 inflation printed eased way less then hoped-for, keeping pressure on the Reserve Bank of New Zealand to hold on to a strong tightening pace. But despite a strong performance today, at NZD/USD 0.57 is still trading weak from a historical point of view.

News Headlines

• At a conference in Sydney, deputy governor Michelle Bullock indicated that Reserve Bank of Australia will likely continue to raise the policy rate further over the coming months even as the RBA earlier this month unexpectedly slowed the pace of rate hikes to a 25 bps step (2.60%). According to Bullock the slowdown compared to other central banks was due to domestic factors. At the same time, the RBA policy rate trajectory also was assessed to be steep(er) compared to other central banks. According to Bullard the high frequency of RBA meetings also allows the bank more frequent evaluation of evidence if necessary. Even so, Bullock indicated that RBA was concerned on the impact of previous rate hikes on household spending, a worry that also emerged from the RBA minutes published this morning. The Aussie dollar yesterday and today joins the broader correction of the dollar. At AUD/USD 0.6335, the Aussie dollar tries to rebound off the cycle low near 0.617 touched last week.

• The Central Bank of Turkey announced new measures to support lira deposits and raise the cost of holding deposits in foreign currency. The bank raised the security maintenance ratio for foreign exchange deposits to 5% from 3%. At the same time, the Bank also requires banks with less than 50% of lira deposits to hold an additional 7% of bonds from the start of 2023. The move is seen as a step in the liraization approach of Turkish authorities. Despite the measures, the lira is losing modestly ground against the euro today, trading near EUR/TRY 18.35.

Graphs & Table

USD/NZD: kiwi dollar takes lead in G10 landscape after CPI eases way less than hoped for.

US 10y yield again tested the 4% level but this resistance level proves too strong for now.

EUR/TRY: Turkish lira not impressed with new liraization measures. Markets eye Thursday’s CBRT policy meeting.

S&P 500 leaves downward sloping trend channel. Encouraging technical sign but with risk of being in a bear market rally.

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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