Fri, Jan 21, 2022 @ 03:08 GMT
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Sunset Market Commentary

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It truly is a black Friday today. Overnight news of a highly contagious South African coronavirus variant that has mutated so much it may be resistant to current vaccines sparked a heavy sell-off in risky assets. The new strain already set foot in Europe, with Belgium confirming its first case. European stocks slide more than 3% with the travel industry, energy and financials leading declines. Wall Street rejoins global markets with a shortened session where losses mount to 2% (DJI). The VIX “fear” index surged beyond 25, the highest level in six months. Core bond yields get slammed. USTs are very well bid, causing the curve to bull flatten with changes ranging from -11.4 bps (2y) over    -15.2 bps (5y) to -8.1 bps (30y). The emergence of this potentially vaccine-immune strain may hamper the recovery, exacerbate supply-driven inflation and thus pose an ever bigger dilemma for central banks. US money markets indeed push back bets for a second Fed rate hike. German yields shed 1.7 bps (2y) to 7.2 bps (10y). The 10y lost support at -0.24% (38.2% retracement from the Aug-Oct recovery) yesterday and is already more than halfway to the next reference around -0.347% (61.8% retracement). UK Gilt yields suffer heavy losses as well, all within a range of 10-13 bps.

FX markets follow the traditional risk-off script. The yen hugely outperforms peers. USD/JPY tanks 1.5 big figures from 115.36 to 113.87. EUR/JPY hit support at 128 before rebounding to 128.54. The Swiss franc aims for silver. EUR/CHF fell below recent multi-year lows around 1.045 in early European trading but there were no follow-up losses. Markets may be reluctant to send the Swissie much higher from current levels, having in mind the SNB that is not too shy to intervene from time to time. Third place today goes to the … euro. The ECB’s steadfast focus on growth along with the much sharper repricing in US bond yields allow for the common currency to stand up against bookie favourite n° 3 in case of risk-off, the USD. EUR/USD is testing previously lost support at 1.129. In a similar vein, EUR/GBP surpassed 0.845 intermediate resistance and tested the April low at 0.8472. You would expect that the South African rand is at the centre of attention in emerging markets. While the currency does slip against virtually all EM peers (USD/ZAR >16), its losses pale compared to those in the Turkish lira. Amidst huge risk-off, president Erdogan said interest rates will decline and said the currency’s moves have no basis while blaming “global hitmen” for standing in the way of Turkey’s economic path. Talk about timing. EUR/TRY is set to close the week north of 14.

News Headlines

Bank of England Chief Economist Huw Pill delivered his first real speech at the Confederation of British Industry. He says that, provided the jobs market continues to be strong, he thinks interest rates will need to gradually increase in the coming months, to make sure inflation comes back down from current high levels. For Pill, the burden of proof has now clearly shifted. In September, when he took up the role as chief economist, he was still seeking data to confirm his assessment of the strength of the post-pandemic recovery and accumulation of inflationary pressures. Now he scans incoming information for challenges to that view. Pill does points out that the medium term economic picture is still uncertain, so the BoE can’t give precise guarantees on what will happen to interest rates, especially further into the future than the coming months.

The Swiss economy kept its growth pace more or less stable in Q3, rising by 1.7% Q/Q vs 1.8% in Q2. The outcome was slightly stronger than expected with Y/Y growth coming in at 4.1%. Details showed that consumption was the key GDP driver at 2.7% Q/Q. Government spending (-1.5% Q/Q) and gross fixed capital investments (-0.8% Q/Q) contributed negatively. The positive contribution from net exports (+1.3% Q/Q) hides a decline in both exports (-0.1% Q/Q) and imports (-1.4% Q/Q). The State Secretariat of Economic Affairs noted that Swiss output is 1% above its pre-pandemic level. Switzerland’s relatively low vaccination rate puts the recovery at stake in case of potential future covid-waves. EUR/CHF reached its lowest level since 2015 south of 1.0450 in today’s risk-off climate.

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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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