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Sunset Market Commentary


Risk sentiment remains shaky with main European indices losing up to 2%. The EuroStoxx 50 does hold above the lows from the start of the week (4035) and the incoming mild uptrend line / neckline multiple top formation (4051). Losing those levels would be disastrous from a technical point of view and introduce the start of a new selling wave. We understand investor caution going into the weekend given the instability in the Russia/Ukraine conflict and following this week’s hawkish Fed message. US equity futures turned Apple-led gains into losses and face a key session as well. The same reasoning holds as for European indices: stay above the lows from the start of the week or risk a new selling wave. The dollar initially eked out additional gains with a new recovery high for DXY at 97.44 and for EUR/USD at 1.1121, but started losing momentum going into the US eco data releases. The move coincided with rebound action higher in short term US Treasuries. December PCE deflators were roughly in line with expectations, but this shouldn’t surprise after yesterday’s Q4 GDP print. Income-related figures disappointed. The employment cost index slowed from 1.3% Q/Q in Q3 to 1% Q/Q in Q4. Personal income rose by 0.3% M/M in December, down from 0.5% and vs 0.5% expected. Personal spending declined by 1% M/M. The US yield curve currently bear steepens with yields adding 0.3 bps (2-yr) to 2.6 bps (30-yr) across the curve. German yields rise by 1.5 bps to 4 bps with the belly of the curve underperforming the wings. A weak German Q4 GDP print (-0.7% Q/Q) didn’t meet with haven buying as it was already flagged by the statistics office. European bond markets continue repositioning in the direction that the ECB will one day or another finally give in to building inflationary pressures. A taper acceleration and 2022 rate hike both feature in such scenario. 10-yr yield spreads vs Germany are broadly unchanged. The fifth attempt to elect an Italian president failed as well. There will be an extra voting round later today. Next week’s eco calendar features the key US eco data at the start of the month (ISM’s, ADP & payrolls) and several central bank meetings. The ECB meets on Thursday, but for now is expected to keep a blind eye to the inflation problem. The March meetings, including new forecasts, is probably the better fit to make a U-turn. The Bank of England is expected to deliver back-to-back rate hikes for the first time since 2004. Lifting the policy rate to 0.5% will simultaneously initiate the natural roll-off of the balance sheet. The Czech National Bank is number three to convene on Thursday and will likely deliver another 75 bps rate hike to 4.5%. The CNB has one the most aggressive tightening cycles amongst developed nations for now. Based on current forecasts, it could be the last or second-to-last rate hike with the CNB policy rate peak probably being somewhere between 4.5% and 5%. The Australian central bank (RBA) on Tuesday could decide to abruptly end net asset purchases and perhaps open the window for rate hikes later this year, something money markets are already discounting.

News Headlines

Belgian GDP grew 0.5% q/q in the final quarter of last year, preliminary data by the NBB showed. Compared to the same period one year earlier, GDP was 5.6% bigger and 6.1% on an annual basis. The industry pulled the economy, growing 3.3% q/q in value added, followed by the services industry at a distance (0.3% q/q). Construction declined 0.6% q/q. Inflation in Belgium meanwhile soared in the first month of 2022. Prices rose a stunning 2.23%, the largest m/m increase since March 1951, to bring the yearly figure a near four-decade high of 7.59% (vs 5.71% in December). 4.97 ppt comes from surging energy alone. Core inflation however also rose, from 2.53% y/y to 2.98%. Services inflation accelerated from 2.82% to 3.35%.

The cost of insuring sub-IG corporate bonds via credit default swaps hit the highest level since November 2020 in Europe and the US. Spreads with investment grade CDSs reach a similar milestone. Insurance costs have been on the rise since the start of the year with markets becoming wary of the potential impact of (US) monetary policy normalization on the corporate life.

KBC Bank
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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