Monday, August 29, 2022

Daily Market Overview

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• Powell’s hawkish 9-minute speech on Friday was followed by decisive commentary from ECB’s Schnabel and Villeroy over the weekend. That delivered a one-two punch to core bonds at the start of the new week, keeping the almost one-month old repositioning firmly in place. Bonds fell sharply during early European trading hours but then recovered a bit. A steep drop in (Dutch) natural gas prices – at some point more than 11% – helped to explain the move. It was a combination of some profit-taking after the scorching rally last week and Germany announcing it will probably reach the October 85% storage target already next month. Nevertheless, yields gains still flirt with or even went into the double digits. Europe underperforms. Swap yield changes range between 1.3 bps (30y) and 14.3 bps (2y) in a flattening move. The latter pierced through the 2% resistance level (previous cycle high) to see an intraday high at 2.13% before paring gains back to 2.07% currently. It’s the result of markets ramping up bets for a 75 bps move at the September ECB policy meeting next week. There’s an 85% chance discounted. The 10y reference yield jumps 9.6 bps (2.39%) and narrows the gap with the June cycle high to 22 bps. German yields advance 5.7 bps (30y) to 11.8 bps (5y). The shortest 2y tenor settles back above 1% for the first time since mid-June. Peripheral spreads with Germany’s 10y narrow 1-3 bps with Greece outperforming. US yields grow 1.6 bps (2y, attacking the previous cycle high at 3.45%) to 4.5 bps (10y, confirming the weekly close above 3% last week) in otherwise quiet trading.
• On currency markets, Japanese yen weakness catches the eye. Risk-off on stock markets does little to offset the pain coming from searing core bond yields. EUR/JPY rises more than a percent to 138.6. USD/JPY (now 138.48) tested the previous 24-y highs in the 139+ area. The greenback traded solid in Asian dealings but lost some momentum as Europe started joining. It helped EUR/USD to bottom near the year-lows around 0.9914 and to head back to parity. On a trade-weighted basis, DXY’s attempt to take out the July 109.29 cycle high failed. Instead, it changes hands in the 108.66 area. Sterling loses out against most G10 peers but is trading in thin liquidity circumstances (UK markets closed for the Summer Bank Holiday). EUR/GBP surpasses the 0.85(4) barrier. GBP/USD set new 2022 lows (1.165) before capping losses to 1.17.
News Headlines

The trade deficit of the Turkish Republic jumped to a new record in July, rising from $8.2 bln to $10.7 bln. The deficit over the January-July period also rose to $62.2 bln, being 143.7% higher compared to the same period last year. Exports in July rose 13.4% from the same month last year, but imports at the same time jumped 41.2%. The value of energy imports almost doubled. The ballooning trade and current account deficit further complicates Turkish monetary policy. The country aims to reduce the current account deficit via higher exports to ease pressure on the currency and support financial stability. However, deeply negative real yields due to the extremely stimulating monetary policy fueled a spiral of a weaker currency reinforcing domestic inflation while at the same time raising the external deficit due to higher import prices. The Turkish lira weakened slightly today to EUR/TRY 18.16, but losses after all remain modest given a substantial rise in yields in Europe and the US.
• The Czech Minster of Industry Jozef Sikela today said that the Czech Republic, which currently holds the rotating presidency of the European Union, called an extraordinary meeting of the EU energy ministers to address the sharp rise in European energy prices. Among the measures that will be proposed is capping the price of gas used for electricity production. At the same time, Sikela indicated that the aim isn’t about returning prices to the original level, but to restart functionality of systems and safeguard operation of the economy. Measures proposed will also try to separate gas prices from electricity prices.

Graphs & Table

European 2y swap yield gaps above 2% resistance level as hawkish ECB comments resonate.

USD/JPY: yen suffers from sharp core bond yield rise.

EUR/TRY: lira contains losses after new record trade deficit.

(Dutch) natural gas prices retreat sharply after an impressive rally last week and as German storage sites get filled faster-than-planned.

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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