Monday, September 19, 2022

Daily Market Overview

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• No mercy for sterling today even as it’s the Queen’s state funeral. Cable is drifting towards Friday’s sell-off low at 1.1350 with EUR/GBP reaching for the 0.88 big figure. General market conditions are thin though in Asia and Europe with Japan and London closed. The trading theme is well-known: central bank’s determination in normalizing and tightening monetary policy even as alarm bells are ringing on the strength of the economy. Risk sentiment on stock markets remains negative. Main European bourses cede up to 1%. The Eurostoxx 50 is testing the early September lows (3450 area) which is final intermediate support ahead of the YTD low zone just below 3400. A break lower would be a strong signal that the sell-on-upticks pattern is still in place. Key US equity benchmarks open with losses to the tune of 0.5%. Brent crude loses the $90/barrel mark, approaching the September low at $87/b. Core bonds face selling pressure going into this week’s central bank gatherings, though the pace is slowing compared to last week’s hemorrhage. German yields add 2.2 bps (10-yr) to 5.4 bps (2-yr) in a daily perspective. Changes on the US yield curve range between -0.5 bps (30-yr) and +7.2 bps (2-yr). Just like last week, the dollar fails to really profit from the additional rate boost and the fragile risk environment. EUR/USD switched sides intraday around parity, changing hands at 0.9985 at the moment of writing. The trade-weighted dollar at 110 holds south of the 110.79 YTD high. An additional dimension of dollar strength seems unlikely ahead of Wednesday’s FOMC meeting. We expect another 75 bps rate hike with markets, if any, erring on the hawkish side of that call. New policy rate projections will give a strong indication on how far the Fed is willing to go and for how lang. Markets adapted accordingly on the former, putting the policy rate peak near 4.5%, but still disagree with the Fed’s current marching orders that policy rate cuts won’t come in 2023. Other central bank gatherings this week are in Sweden, the UK, Switzerland, Norway and Japan. All of them, apart from the BoJ are expected to continue (and most of them accelerate) their tightening cycles.
News Headlines

• According to a statement of the Norwegian Finance Ministry, the country is facing a growing funding need of ‘tens of billions of kroner’ for next year as the country has to cope with the cost of spending in the likes of national insurance, the integration of Ukraine refugees, construction projects and subsidies to alleviate power prices of households. However, the government indicates that it doesn’t want the rising gap to be filled by a higher use of proceeds from the countries country’s oil wealth fund as increased spending funded from such a source could put further pressure on inflation and on the interest rate path. So the government will look to other ways to close to budget gap as it will present its budget on October 06. The krone weakened further today with EUR/NOK trading in the 10.29 area, the weakest level for the Norwegian currency since mid-July.
• According to a proposal for a Single Market Emergency Instrument made public by the European commission today, European authorities are seeking emergency powers that could force European companies to prioritize the production of key production and stockpile such key goods. The proposal is a reaction to supply chain disruptions caused by the Covid pandemic and by the war in Ukraine. “We need new tools that allows us to act fast and collectively at whatever kind of risk we face,” Commission Vice-President Margrethe Vestager was quoted at a news press conference. The new instrument is still subject to internal political debate an also raises critics from some industry groups.

Graphs & Table

EuroStoxx50: September lows are final (minor) support ahead of YTD low

US 2-yr yield: the only way is up!!

Gold loses support from 2021 and 2022 lows at $1675/ounce

EUR/NOK: Norwegian currecny on the backfoot on updated funding plans and weakening oil price

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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