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Sunset Market Commentary


European stock markets opened slightly positive after Friday’s beating, but risk sentiment gradually dwindled throughout the session. At the time of writing, main indices (-0.4%) are at risk of setting new correction lows. German Chancellor Merkel warned that the latest Covid-19 spike is “highly dramatic” and worse than anything Germany has experienced. She called on the country’s states to introduce tighter restrictions already this week, adding that hospitals would otherwise soon be overwhelmed. Last week’s Covid-warnings by German health minister Spahn and Austria’s effective lockdown announcement sparked the risk aversion at the end of last week. Spillover effects from stocks to bonds and FX remains very limited this time around, especially given the absence of other eco data and/or events. The German Bundesbank warned that German inflation will spike just under 6% in November, while staying north of 3% for a longer period. Simultaneously, GDP could stall in Q4. German Bunds follow US Treasuries south, the latter obviously still underperforming. German yields rise by over 2 bps across the curve. The US yield curve bear rises by 3.1 bps (30-yr) to 6 bps (5-yr) with the frond and belly of the curve underperforming. Three factors are at play. First tonight’s early kick-off to the end of month refinancing operation (2y & 5y Note auctions). The US Treasuries conducts these first sales earlier than normal because of the holiday-shortened Thanksgiving week. Second, last Friday’s Fed comments still resonate. Fed Waller and vice-chair Clarida joined St. Louis Fed Bullard’s call to think about speeding up the recently started QE tapering process. They argue that inflation accelerated more than expected, that activity indicators so far point to a stronger-than-forecast Q4 and that the labour market recovered more quickly than anticipated. They hope to have a debate in December, eying a potential January decision. Doubling the taper process from $15bn/month to $30bn/month at the start of next year implies ending net purchases by the end of Q1 2022 instead of mid-2022. It would allow the Fed to move quicker on rate normalization. Finally, US President Biden today nominated Fed Chair Powell for a second term in office while Washington-based Fed Brainard gets bumped to vicechair after Clarida’s term ends end January next year. Some feared that Fed policy could turn even more dovish should Brainard replace Powell. Interest rate differentials again played in favour of a weaker EUR/USD rate. The pair drops from a 1.1307 op to a new cycle low of 1.1240 currently. The trade-weighted greenback sets a new recovery high at 96.40 with USD/JPY attacking 114.75. The euro and sterling hold a tight balance around 0.8390, with the UK currency unimpressed by backtracking comments by BoE Bailey and Pill.

News Headlines

After reaching a post-corona top in June, July and September (8.0), Belgium consumer confidence dropped for the second consecutive month, printing at 1.0 (down from 4.0 in October), the lowest level in 7 months. Households especially became more pessimistic on the economic outlook for the next 12 months (-7 from 0) and to a lesser extent about a rise in unemployment. The assessment on households’ financial conditions was unchanged at -3. The prospect on savings was little changed at 15 from 16, but still marked the lowest reading since February.

November Hungarian GKI economic sentiment dropped from 2.5 to 0.2. Business confidence improved to a two-and-a-half year high (9.1 from 8.7). However, this was more than offset by a sharp decline in consumer confidence    (-25.2 from -15.2), which the survey labelled as ‘a rate rarely seen in a single month’. Consumer confidence is now back at the levels seen in spring. The report also mentioned that all economic players in the economy now expect prices to rise, even after the central bank last week raised the base rate (2.1%) and the 1-week deposit rate ( 2.5%). The forint today touched a historic low against the euro, briefly trading north of EUR/HUF 370. This is putting pressure on the MNB to raise the weekly deposit rate further. The MNB last week said that it will respond to short-term risk in financial and commodity markets by using this instrument in a quickly and flexible manner.

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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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