Sunset Market Commentary – Forex Action

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Markets

Late last week, investors concluded that EMU and US yields were pricing in “reasonable” tightening given the highly uncertain path for growth and inflation in the second half. US markets priced in the Fed’s points scenario for a policy rate of 3.4% at the end of this year and 3.8% next year. 2.25% is discounted for the ECB next year. These levels exceed what is commonly considered to be the neutral rate. Interest rates above neutral are “logical” given the overshoot of inflation. always like there was good reason for yield markets to adopt a more neutral stance, awaiting the reaction function of CB in the event that growth did indeed slow materially. German May Ppi Inflation Printed As Expected at 1.6% m/m and 32.6% y/y (was 33.5% in April). On the contrary, the good news was that it did not bring an upward surprise. Commodities, including oil, copper and iron ore, maintain their decline from last week as investors reflect on the impact of lower demand. European Yields Early in the Session Eased Slightly, But The Move Was Reversed Later. German yields rise to 5.0 basis points (5 years). Rising natural gas prices somewhat complicate the story of potentially lower inflation due to weaker demand (see below). European stocks average gain of approximately 0.50 %. Given recent sell-off, it’s much too early to label this as a rebound. Intra-EMU bond spreads present a mixed picture. France underperforms slightly After President Macron Fails to Secure A Majority in Salliament (10-y Spread vs Germany +3 BPS). Greece (-7 basis points) and Italy (-6 basis points) tighten further as the ECB prepares an instrument to prevent market fragmentation.

(Holidays of June 19). The DXY index drops a few ticks (104.30). L’USD/JPY (134,95) se maintient près du pic pluriannuel de la semaine dernière. The yen Struggles as the boj continues its lonely day of more policy accommodation. The euro wins slightly (EUR/USD 1.051), but the technical table did not change with the first resistance to 1,0601 that it was necessary to break to open the way to a return to the top of the fork of 1.0806. The pound sterling is losing (modest) ground (EUR/GBP close to 0.858). UK CPI and retail sales (Wednesday/Friday) are the next benchmarks to gauge the BoE’s chances of accelerating the pace of rate hikes in the second half. The Swiss franc continues to shine (EUR/CHF 1.014) after the SNB’s interest rate hike last week, there was a sudden reversal in its assessment of the valuation of the franc (which is no longer overvalued). In Central Europe, the zloty outperformed (EUR/PLN 4.66). The Czech koruna does not benefit (EUR/CZK 24.73) in view of a (final) expected rise in CNB rates on Thursday (100 or 125 bps).

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The Dutch gas futures contract is trading at €126/MWh, the highest level since mid-March, when it soared after the Russian invasion. The pricing is linked to the fact that Russia has reduced the supply of the main buyers, including Germany, Italy and France, by invoking technical problems that prevent the pipeline from working. Nord Stream is now operating at only 40% capacity. The European Commission said Russia uses energy as “blackmail”. A breakdown at the Texas Freeport LNG factory, which has made fewer cargoes available from the United States on which Europe counted to reconstruct the reserves, adds to prices upwards. The German government has already asked residents to reduce their consumption and declared on Sunday that it would adopt emergency laws to reopen coal power plants for electricity production.

US corporate bond funds saw billions of dollars flow out last week, suffering a double blow from rising yields and growing fears of an economic slowdown as the Fed tightens to fight inflation. In the week to June 15, $6.6 billion was withdrawn from high-yield bond funds, the FT reported using data from EPFR. It was the biggest release since the big sale in March 2020 and already brings the cumulative amount to nearly $35 billion. Funds that buy investment-grade bonds saw an outflow of $2.1 billion this week, the biggest weekly drawdown since April 2021. CDS (high yield versus investment) spreads fell from multi-year lows in mid-2021 at nearly 500 basis points – the highest level since May 2020.

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