Fri, Oct 07, 2022 @ 07:18 GMT
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Sunset Market Commentary

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The Fed’s rare statement to support the economy “as appropriate” on Friday was followed by other pledges by central banks like the Bank of Japan and lifted overnight Asian sentiment. ECB’s Villeroy said the central bank is “vigilant” with respect to corona, a comment later echoed by de Guindos and Wunsch. Intentionally or not, but former ECB president Trichet used that same wording to hint at imminent action. De Guindos did add however that fiscal policy should be the first pillar to address the economic fall-out from the virus while Wunsch warned for assuming a V-shaped recovery. European markets initially followed Asia in lockstep with stocks opening in the green. Corona – or let’s face it and call it recession – fears soon took the upper hand though. The OECD sounding the alarm and cutting global growth forecasts evidently didn’t really help sentiment. Price action on bond markets already suggested that the “risk on” was extremely fragile and equity markets soon followed suit. European equities swapped intraday gains for losses (up to -1.6%) before gradually recovering as US investors trickled in. US stocks opened in the green, gaining about 0.5%. The US yield curve bull steepens relentlessly with yields nosediving -12 bps (2-yr) to -7 bps (10-yr). German yields decline 4 to 5 bps across the curve. Peripheral spreads widen substantially in Greece (+11 bps) and Italy (+15 bps). EUR/USD caps another big figure on the charts – the fourth in just 7 trading days – and is trading comfortably in the 1.11(3) area (from an intraday low at 1.10). USD/JPY topped out at 108.50 already at the start of European dealings and is currently changing hands in the 107.65 area (vs. 107.9 at Friday’s close). The dollar thus remains under pressure as it is losing interest rate at a stellar speed. It’s very unlikely that even a markedly better than expected US ISM later today would be able to turn the tides for the greenback in the short run.

Sterling headed towards the EUR/GBP 0.86 during early trading hours as (Asian) sentiment boosted sentiment. That didn’t last very long though. Sterling couldn’t hide for the overall risk-off environment. Additionally, the Bank of England also stepped in, saying it will take all the steps needed to protect stability, prompting speculation for monetary easing. Markets now discount an 80% chance for a rate cut already in March. EUR/GBP jumped towards the 0.87 area, up from Friday’s close at 0.86. Cable hovered near opening levels, currently filling bids around 1.278.

News Headlines

The OECD slashed its global growth outlook for this year to 2.4% from its 2.9% forecast in November and warned of a possible global contraction this quarter. The organisation described the coronavirus as the global economy’s “biggest danger since the financial crisis” and cautioned that a “longer lasting and more intensive coronavirus outbreak” could slash growth to 1.5 per cent in 2020. The OECD called on central banks and governments to act “swiftly and forcefully” to combat the fallout of the virus, calling for monetary and fiscal stimulus to restore confidence.

ECB’s vice president Luis de Guindos warned the coronavirus adds a new layer of uncertainty to growth prospects in the euro area through both demand- and supply-side channels. He noted the ECB “remains vigilant and will closely monitor incoming data” but stressed that the epidemic requires a fiscal response rather than monetary easing. ECB’s Wunsch and Villeroy sang the same tune.

UK’s PM Boris Johnson set his red lines in trade negotiations with the US, insisting the UK will not give ground when it comes to the price of drugs and its high standards on food safety and animal welfare. But Johnson’s government considers dropping its plan to impose a new digital tax on big US tech companies in a bid to ease talks somewhat.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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