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Sunset Market Commentary


Be careful what you wish for. The Bank of England wishes to end its emergency bond buying at the very long end of the curve after this week, but markets are calling the UK central bank’s likely bluff. The UK 30-yr yield exceeds the 5% mark today for the first time since the huge sell-off early September which triggered the BoE’s U-turn on bond buying – be it for “financial stability reasons”. Recall that it was UK Chancellor Kwarteng’s mini-Budget (£65bn of debt-funded tax cuts) which lighted the fire. It forced a huge repricing of UK credit risk given the country’s big twin deficits and given the Bank of England’s shrinking of its QE bond portfolio. UK yields today rise by up to 27 bps at the very long end even as the BoE is probably intervening big time to stop the rot. We think it’s strange that sterling manages an intraday comeback today with EUR/GBP falling back from 0.8850 to 0.8785. In the current market climate, we’ve seen similar useless interventions in FX space. USD/JPY today for example sets a new multi-decade high of 147 despite the ministry of Finance burning through its reserves. The USD/JPY 1998 high of 147.66 is within reach. Next resistance is the 1990 top of 160.20.

The sell-off in UK Gilt markets spills to European bond markets. The reasoning on the return of some sort of European credit risk premium holds. Several nations presented multibillion fiscal support packages to help carry the burden of the energy crisis. Germany floated the idea to use the “exceptional” route of EU debt again (eg SURE-programme to finance unemployment benefits in the wake of the COVID-pandemic). The monetary context in Europe is also evolving to a central bank withdrawing liquidity by letting its bond portfolio wind down from next year onwards. The German yield curve bear steepens with yields rising by 6.3 bps (2-yr) to 15.8 bps (30-yr). German Bunds underperform swaps with the EMU swap curve up to 8 bps higher. US Treasuries sail quietly through the storm ahead of tomorrow’s CPI release. Daily changes are limited to +-1 bp. Main European stock markets trade between 0.5% to 1.5% in the red with US stock markets opening without conviction. EUR/USD flips up and down the 0.97 big figure.

News Headlines

OPEC for the fourth time this year cut its forecast for global oil demand growth. According to the OPEC statement, oil demand growth in 2022 is revised down by 0.5mn b/d due to macroeconomic trends and oil demand developments in various regions. These developments include the extension of China’s zero-COVID-19 restrictions in some regions, economic challenges in OECD Europe, and inflationary pressures in other key economies. The factors have weighed on oil demand, especially in 2H22. With this, global oil demand for 2022 is now expected to grow by about 2.6mn b/d, 460 000 b/d lower compared to the previous forecast. In the OECD, oil demand growth is estimated at about 1.4m b/d with the non-Europe OECD at about 1.3 mb/d. 2023 world oil demand growth is revised down to about 2.3mn b/d to 102.02mn b/d (a downward revision of 360 000 b/d). Still OPEC expects 2023 demand to return to surpass the pre-pandemic level of 2019. Brent oil eases slightly today to trade just below $94/b.

Indian inflation in September rose further to 7.41% Y/Y, holding above the 4.0% +/-2.0% target band of the Reserve Bank of India throughout the whole of this year. The consumer food price index, rose 0.98% to be up 8.6% compared to the same period last year. Aside from the rise of individual product groups, the ongoing depreciation of the value of the rupee adds to broader inflationary pressures. The RBA at the end of last month raised its repurchase rate by 50 bps to 5.90%. A further, potentially more modest rise is expected at the next (December) meeting. At USD/INR 82.3, the rupee continues trade within reach of the all-time low gains the dollar reached earlier this week.

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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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