Monday, October 24, 2022

Daily Market Overview

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• Investor attention was focused on the release of PMI business confidence today. As one could have expected, they didn’t really paint a rosy picture on the European economy. They scream “stagflation” with the Eurozone economy having slipped into a deeper downturn at the start of the final quarter. High energy prices weigh on activity in the manufacturing sector (from 48.4 to 46.6) while the cost of living crisis and broad-based economic uncertainty hurts services (from 48.8 to 48.2). Business confidence in the year ahead remains at one of the lowest levels seen over the past two years all the while price pressures remain elevated at historical highs. Rising energy and staff costs as well as the weakened euro offset lower commodity prices due to supply chains having gradually improved. S&P Global (rightly) says this will likely add to the ECB’s resolve to tighten policy further in coming months despite a growing recession risk. This conclusion is what drove markets in a first reaction. European stocks extended losses while yields in Germany sprinted higher to erase opening losses – partially a catch-up move with the US on Friday – of more than 10 bps. Things went in reverse again around noon. Yields topped, equities bottomed, perhaps in a sign that enough (hiking) news is priced in going into the ECB policy meeting this week and the Fed and Bank of England next week. European stocks at the moment add almost 2% (EuroStoxx50). US indices add half a percent after surging last Friday. Net changes in yields range between -2.2 bps to -9.1 bps in a flattener for Europe/Germany. Yields in the US add 1.1 -4 bps across the curve. UK gilts hugely outperform on the news that former Chancellor Rishi Sunak is set to become the UK’s new prime minister. Johnson backed out over the weekend and his other rival, Mordaunt, withdrew after not having secured enough backing from Tory MPs. UK yields tank 15.3 bps (30y) to 33.1 bps (2y). Money markets further price out BoE tightening with the terminal rate now seen at 5% compared to 6% just a few weeks ago. Sterling is also one of the better performers on FX markets. EUR/GBP briefly fell through 0.87 but the pound was unable to maintain all gains. Dramatic PMIs immediately flagged the downside of having a fiscally conservative PM. UK politics are a lose-lose for sterling either way. Cable is trading almost unchanged around 1.128. Despite risk-on, the dollar is well bid in general. EUR/USD loses slightly to 0.983. Trade-weighted DXY rises from 111.6 to 112.3, thanks to USD/JPY. The yen already erased virtually every gain made last Friday after the MoF stepped in with interventions. Most commodities are under pressure today. Oil loses about 1.5% with Brent hovering north of $90/b. Gas prices (Dutch TTF) drop below €100/MWh for the first time since June this year.  
News Headlines

• Czech consumer & business confidence deteriorated further in October, dropping from -2.6 to -2.9 for the aggregate index. It’s the lowest level since March 2021. Consumer confidence slid from -33.8 to -34.5 (softest since March 1999) with business confidence decelerating from 5.2 to 5 (weakest since March 2021). Consumers fear a worsening of their financial situation amid great economic uncertainty and the rising threat of unemployment. On a bright note, they become less concerned about future price growth. Great uncertainty about future developments, material shortages, deteriorating demand and high prices affect most businesses (trade and selected services are notable exceptions this month).
• The Belgian debt agency tapped OLO 94 (€1.17bn 0.35% Jun2032) and OLO 95 (€1.01bn 1.4% Jun2053) today. The auction bid cover was 1.69 with the combined amount raised being near the upper end of the targeted €1.7-2.2bn. The debt agency now raised €42.17bn via OLO’s this year, which is above the stated goal of €41bn. There is still one official OLO auction date remaining (November 21).

Graphs & Table

Gas prices (Dutch TTF) drop below symbolic €100/MWh.

European 10y swap yield tests support from lower bound in upward sloping channel as markets await ECB later this week.

USD/CNY surpasses multiyear highs as markets assess the outcome of the party congress and Xi Jinping’s third term.

EuroStoxx50 rallies almost 2% as yields correct lower. Escapes ST downward trend channel.

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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