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Sunset Market Commentary

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After a further rise/steepening of yield curves earlier last week, comments from BoE’s Pill on Friday provided the perfect trigger for a corrective flattening. He indicated that CB’s can’t take the risk leaving inflation unaddressed and/or inflation expectations becoming unanchored. He suggested a scenario of a pre-emptive, but all in all ‘modest’/short-lived hiking cycle as concerns on growth continue to reverberate, too. This week, markets will have to navigate further through the balance between growth and inflation. The German Ifo business climate at least suggests growth worries are gaining importance. Business climate fell from 98.9 in September to 97.7 in October with manufacturing, services and trade all ceding ground. Construction was the exception to the rule. The communique reads: ‘Skepticism is increasingly evident in expectations. Companies’ assessments of their current situation are also less positive. Supply problems are giving businesses headaches. Capacity utilization in manufacturing is falling. Sand in the wheels of the German economy is hampering recovery.’ Later this week, we’ll receive plenty of evidence on growth and inflation. However, if the growth narrative would come under further pressure, CB’s soon might face a huge dilemma on their conviction to address inflation. (10-y) Inflation swaps (~ expectations) in the US (2.87%), the UK (4.44%) and EMU (2.16%) all extended their march north. This helped a  reversal of Friday’s setback in LT yields. However, the move gradually evaporated in US dealings. US 2 & 5-y yields decline 2.5 bps. The 30-y rises 2.0 bps. The German curve also steepens with the 2-y declining 2.0 bps while the 30-y jumped 3.0 bps. Brent oil touching a post-corona top north of $86 p/b reinforces the narrative of supply issues raising inflationary pressures and at the same time hampering growth.

After a technical (albeit modest) correction end last, the dollar again starts in pole-position. The TW index (DXY) jumped from the 93.50 are to currently 93.85. USD/JPY (113.75) gains a few ticks. EUR/USD this morning again tried an unconvincing attempt to regain the 1.1664 resistance. As already shown last week, even this first reference proved a too high hurdle. USD strength and investor reluctance ahead of Thursday’s ECB meeting both conspired to push the EUR/USD pair back to the 1.16 area. The 1.1530/1.1495 area remains key downside reference. Sterling also again outperforms the euro evens as BoE’s Tenreyro keeps a much more cautious tone on interest rate hikes. EUR/GBP (0.8435) is holding within reach of recent lows/ST range bottom (0.8421)

News Headlines

Belgian business confidence stabilized at 4 in October while consensus expected a setback to 2.4. The headline figure masks contrasting trends between branches of activity: an upturn is observed in business-related services (16.4 from 8.0), while confidence is dropping back in the other branches of activity (manufacturing: 2.3 from 3, building: 1.1 from 4.5 and trade: -2 from 2.2). Belgian consumer confidence last week declined from 8 from 4, the lowest level since May. Consumers remained optimistic on the labour market, but are expecting their financial situation will get worse and they’ll be able to save less.

Central European currencies remain in a soft spot today. EUR/CZK rises above 25.70 for the first time since early July. The move comes even as the CNB last week announced that it resumes the programme of sales of part of the income on its international reserves from January 2022. The central bank added though that transactions will be executed in such a way that their FX impact is minimal. Some market participants perhaps expected more FX support to accompany rate hikes in the inflation battle. EUR/HUF moved beyond 362.50 last week which serves as final (HUF) support ahead of the 370 all-time highs. This level in the past served as a cue for the central bank to tighten monetary policy in order to avoid an even weaker currency. Markets are challenging the MNB’s slow(er) rate hike cycle. The Polish zloty turned regional outperformer last week, but can’t avoid the rod today. EUR/PLN trades back above 4.60. Will the NBP follow-up its surprise rate hike start at next week’s meeting to counter PLN-weakness?

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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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