Sat, Nov 27, 2021 @ 20:27 GMT
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Sunset Market Commentary

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Bond volatility came back to haunt markets. After a rather calm week for bonds, supported by decent long-tenor auctions in the US and to a lesser extent yesterday’s ECB policy meeting, both the German Bund and USTs suffered a blow today. The latter underperformed already yesterday after strong weekly labour data and in anticipation of Biden formally signing the $1900 stimulus bill into law. In his first televised prime time after-market speech, Biden touted the government’s handling of the pandemic and put forward July 4th (US Independence Day) as a concrete date for a return to some normality as the vaccination campaign is running smooth(er than expected). This helps explain part of the UST weakness. The US yield curve bear steepens with yields up 2 bps (2-yr) over 5.8 bps (5-yr) to 8.4 bps (30-yr). The 10-yr yield (+8 bps) is heavily testing recent recovery highs at 1.60%. The 30-yr is only a few bps away from key resistance near 2.41%. German yields changes vary from +2.1 bps (5-yr) to 4.1 bps (30-yr), more than erasing all of yesterday’s ECB-induced decline. ECB’s Muller highlighted that the faster purchase pace announced for the next quarter is only temporary and that the impact of higher yields on the recovery should not be overestimated. Peripheral spread changes are modest. Portugal (-2 bps) takes a narrow lead. Rising yields cause investor caution on equity markets. European stocks slip in the red with losses of about 0.25%/0.5%. On Wall Street, the tech-stocks wear the brunt of the losses with the Nasdaq opening 1.5% in the negative.

The US dollar is having a very good run today. Supported by higher (real) yields, the greenback overcame yesterday’s weakness. EUR/USD retreated during Asian dealings from the high 1.19 area and pierced through the 1.1952 reference in the European session to trade near 1.193 at the time of writing. The trade-weighted DXY (91.89) is flirting with the 92 big figure. USD/JPY surged north of 109 and is on track for a close at the strongest level since mid-2020. The loonie takes the silver medal on the G10 FX stage, performing well against all peers but the dollar after a blow-out payrolls report (cf. infra). Sterling is losing quite some ground against the dollar today (cable dips from 1.40 to 1.388) with knock-on effects on other sterling pairs. EUR/GBP rebounded from the 0.855/0.857 support area to trade just shy of the 0.86 big figure. This move does not yet call off the downside alert in EUR/GBP though.

News Headlines

In a closely monitored survey of the Central Bank of Turkey, inflation for the end of this year is forecast to rise to 11.47. Last month year end inflation was only expected at 11.23%. As such, the forecast for inflation is moving further way from the TCMB’s inflation forecast of 9.4%. Earlier this month, February consumer price inflation was reported at a higher than expected 15.61%. Higher inflation and inflation forecasts are putting pressure on the central bank to raise rates when it will meet next week (March 18). The lira strengthened earlier this week as global long term yields eased, but weakened again this morning. EUR/TRY rose from sub-9.00 levels this morning to 9.0460 currently. In a separate report, Turkey January industrial production was reported at a stronger than expected 1.0% m/m and 11.4% Y/Y (9.2% Y/Y in December and 8.1% expected).

According to a report of Canada Statistics published today, the Canadian economy added 259 200 jobs in February, far more than the 75 000 gain expected. The unemployment rate declined to 8.4% from 9.4%. The rise in employment came as Canadian authorities started to ease lockdown measures. Due to new lockdown measures earlier the Canadian economy had lost a cumulative 265 500 jobs in December and January. Despite the massive beat of consensus expectations, gains of the Canadian dollar against the USD remain limited for now. USD/CAD is trading little changed in the 1.2530 area. The broader USD strength and a tentative topping out in the oil price probably prevented the loonie to fully profit from the strong labour market data.

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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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