Markets
Risk aversion haunts trading today, though markets are off worst/best intraday levels. The accelerating Chinese Covid-outbreak prompted authorities to close down parts of Beijing and adds to global growth worries. European equity markets currently cede up to 1.5%. The Chinese yuan is in freefall ever since last week’s publication of Q1 GDP numbers. USD/CNY today tested the 2021 top at 6.58. Last week around, the pair was still changing hands around 6.35. USD-strength remains part of the story as well in the tough risk context. Especially as the greenback has FOMC Chair Powell’s blessing. The trade-weighted dollar set a new recovery high at 101.75, the strongest level since March 2020. The spike during the early-Covid liquidity crisis at 102.98 serves as next resistance with the 2017 top at 103.82. The strong dollar showed in other FX pairs as well. EUR/USD fainted at the start of European trading, sliding to 1.0707 from an Asian high at 1.0851. The pair currently recovered towards 1.0742. JPY fails to really catch a break despite risk-off market sentiment and despite declining commodity (energy) prices. USD/JPY eases below 128. Brent crude falls from $106/b towards $101/b. Cable (GBP/USD) suffered a second straight beating, crashing to the low 1.27 area from 1.30+ levels early last week. The queen’s money is additionally vulnerable to the rapidly developing UK cost of living crisis, as proven by last week’s and this morning’s dismal eco data. It’s the lowest level for cable since September 2020. EUR/GBP slightly extends gains at 0.8430. Core bonds attract a safe haven bid, correcting higher after last week’s fierce sell-off. US yields drop by 7.3 bps (30-yr) to 12.7 bps (7-yr) with the belly outperforming the wings. The German yield curve shifts in similar fashion with yield declines ranging between 6.4 bps (30-yr) and 13.5 bps (5-yr). 10-yr yield spread changes vs Germany widen by 1 bp to 2 bps. Today’s eco calendar didn’t inspire trading. April German Ifo business sentiment stabilized from a steep drop in March, but didn’t surprise following last week’s PMI’s. The Belgian debt agency raised the maximum amount on offer (€3.8bn) at today’s regular OLO auction. The Kingdom tapped OLO’s 81 (€1.37bn 0.8% Jun2027), 94 (€1.54bn 0.35% Jun2032) and 95 (€0.9bn 1.4% Jun2053). The auction bid cover was mediocre at 1.71. They now completed 41% of this year’s €41.2bn OLO funding need.
News Headlines
According to the quarterly trends survey of the Confederation of British Industry, business optimism dropped from -9% in January to -34% in April, the sharpest pace since April 2020. Output growth in the quarter to April slowed to 19 from 27, but remained above the long term average of 3%. Orders slowed from 38% in January to 22% in April and firms expect a further deceleration in the next three months (6). Average costs in the quarter to April rose at the fastest pace since 1975 (+87%). Domestic costs (60% from 40%) grew at the fastest pace since 1976. Firms see the cost of raw materials as the most important factor behind expectations for cost growth in the next three months, followed by energy costs, transport costs and labour costs. More pessimistic forecasts also caused a setback in investment plans (6 from 26). Sterling already was in the defensive as markets pondered the consequences of the cost-of living crisis on growth and on monetary policy going forward. EUR/GBP touched a (minor) new ST correction top near 0.8440 after the CBI release.
Belgian April consumer confidence recouped ground lost in March. The overall figure rose from 0.4 to 2.4 in the first increase in five months. This was thanks to an improvement in all sectors but services where every subcomponent – though still positive – edged lower. The manufacturing industry turned less negative on their current level in order books and more optimistic on future employment while demand forecasts point downwardly. The latter was also visible in the building industry. But for the time being, it still enjoys a well-filled order book. Trade recovered the most visibly in April, with all components of the indicator improving, especially in demand forecasts and orders placed with suppliers.
