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Sunset Market Commentary

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Should we call it euphoria or are we simply attending a long overdue short-squeeze after a protracted risk sell-off? Whatever, it has been quite a long time since European equities gained 2.5% to 3.5% intraday across indices. A weaker-than-expected US manufacturing ISM yesterday and the Reserve Bank of Australia hiking rates by a smaller-than-expected 25 bps were enough a reason for markets to reassess how fast and how long central banks including the Fed and the ECB, will have to raise rates further to restore the demand/supply balance to drive inflation sustainably back lower. The 2-y US yield and 2-y EMU swap yield at some point declined another 10/15 bps respectively. However, the repositioning eased as the session proceeded. US yields currently are declining less than 2 bps across the curve. EMU swap yields are losing between 6 bps (5-y) and 3 bps (30-y) in volatile trading. Money markets brought the expected Fed and ECB cycle peak rates back to 4.25%/4.50% and about 2.75% respectively. The market also again ponders the scenario of a Fed rate cut late next year, something most Fed members dismissed recently. In interview ECB’s Villeroy said that the ECB without hesitation could bring the policy rate ‘close to’ 2% which he sees as a neutral level. In a second phase, the ECB then could shift to a more flexible and possible slower approach. Today’s market reaction to some extend was reminiscent of the summer when markets assumed that weaker than expected data/fear of a recession could block CB’s rate hike intentions rather soon. However, the likes of the Fed and the ECB recently reiterated that their priority is to arrest inflation. Slower growth might help but (the outlook of sustainably lower) inflation remains key and EMU and US inflation recently remained uncomfortably high. The EuroStoxx 50 currently maintains a gain of 3.25%. US indices open with additional gain between 1.65% (Dow) and 2.5% (Nasdaq). Brent oil jumped from $89 p/b to $91 p/b as market anticipate a substantial OPEC(+) oil production cut this week. For now, this potential new ‘supply shock’ apparently this doesn’t hamper the equity rebound.

On FX, the USD correction even accelerates further. DXY is sliding below the 111 handle. Contrary to yesterday, the euro this time fully profits from the USD-correction. EUR/USD jumped from the low 0.98 area to currently trade at 0.9915. Gains of the yen, however, remain close to non-existent with USD/JPY holding in a tight range just below the 145 big figure. After a ‘post-crisis’ comeback late last week and yesterday, sterling today underperformed the euro despite the broader risk-on context. Investors apparently are scaling back expectations for very aggressive BoE action with UK yields declining about 15 bps across the curve (except for the 30-y). EUR/GBP tries to regain the 0.8721 previous resistance area.

News Headlines

EU Commissioner for the Internal Market Thierry Breton and for Economy Paolo Gentiloni in op-eds for several European newspapers argued for more solidarity among member states in addressing the energy crisis. The piece followed Germany’s plans for a massive €200bn borrowing program to cap power prices announced last week. It draws criticism because it may drive a wedge with member states that have less fiscal room, a concern that grew during the pandemic crisis too before the €1.8tn EUNextGen package was erected. Breton and Paolo said the EU must think about similar “mutualized tools at the European level”. German Finance Minister in a reaction told this crisis is different from the pandemic in the sense that it is a supply shock and not demand that needs stimulating.

Eurozone producer prices rose to a new record-high in August. Pipeline inflation rose a whopping 5% m/m following an already sharp 4% rise the month before. On a yearly basis, factory output prices rose 43.3%, up from 38% in July. The increase was, once again, driven by energy prices (11.8% m/m). Excluding energy and construction, prices rose only 0.3% month over month. The data do not bode well for future consumer inflation readings, which already hit double digits last month, data last week showed.

KBC Bank
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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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