Sunset Market Commentary – Forex Stock


With little data slated for release and attention shifted towards the end of the week, investors relied on yesterday’s trading momentum. Inflation expectations in the United States and Europe continue to rise, with Europe in mind. The 10-year euro inflation swap reached 2.20%. Markets are apparently not at all convinced that the ECB will conclude on Thursday that inflation expectations are (more than well) anchored. Rising inflation expectations coincide with a further decline in real yields. The 10-year US real yield fell back below -1.0% (-1.05%). The German real rate is sinking more and more into uncharted territory (-2.15% !!). For nominal yields, this translates into a further flattening of the curve, with the US 2-year rate rising 1.5 bps while the 30-year eases 2.0 bps. The German curve even pursues an outright bullish flattening, with the 30-year rate losing 2.0 bps. It is far from clear how long this downward trend in real returns can / should continue. At least for now, along with acceptable corporate earnings, it is facilitating favorable sentiment for stocks. European stocks are posting gains of up to 1.0%. The peak of the EuroStoxx50 cycle (reached mid-August) is once again within reach. The American indices (S&P 500, Dow) even open a new record. Downside buying always shows remarkable resilience.

Movements in the cross rates of major currencies are limited. The DXY-USD index is trading little changed in the 93.75 / 80 area. USD / JPY regains the 114 barrier. We assume this is mainly due to risk taking rather than a result of interest rates. In a similar story, EUR / USD is resisting the decline in real EMU yields, hovering in a narrow range just north of 1.16. Even so, the big picture still looks fragile with 1.1664 a tough hurdle for Thursday’s ECB policy meeting. The best global sentiment also stopped the EC currencies from falling. EUR / HUF stabilizes near 365.50. The Czech crown (EUR / CZK 25.70) and the zloty (EUR / PLN 4.6050) are even attempting a (very) cautious comeback.

Diverging dynamics in underlying yields obviously benefited the pound. EUR / GBP drifted to the recent low of 0.8421 with CBI retail sales provide the final push in the return of the pound sterling. The surge in retail sales pulled the pair close to 0.84, with GBP / USD testing recent highs near 1.3835. Next week will be interesting from a British point of view. British Chancellor Sunak to leave budget plans tomorrow which will include a higher national living wage and the end of the wage freeze in the public sector. Better-than-expected growth forecasts imply improved fiscal data and allow Sunak to focus more on spending. Such a result could improve short-term sterling earnings. UK benchmark for trading arrives Friday, when Brexit Minister Frost meets EC Vice-President Sefcovic take stock of the Northern Ireland Protocol talks. A less vigilant tone could still support the pound sterling, especially against a weak euro. Finally, the Bank of England is meeting next week with an outside chance of an early start to the tightening cycle. The next major support for the pound is at 0.8277 / 0.8310 which is 2019/2020 lows.


The german government reduced growth rates for this year from 3.5% to 2.6%, according to Reuters sources familiar with the decision. It did so because of supply issues, including the scarcity of semiconductors and intermediate goods essential to German manufacturing. Recently, the European Union has also warned of magnesium shortages, an essential component of aluminum as Chinese exports to the bloc collapsed. German growth has, however, been revised upwards for 2022, from 3.6% to 4.1% before normalizing to 1.6% in 2023. The government considers inflation to be temporary and sees increases in prices will ease to 2.2% in 2022 and 1.7% in 2023.

The US junk bond market has reached an unprecedented $ 1.5 billion, FT reported based on ICE data services. A record 149 companies have already joined the high yield bond market this year, already eclipsing the previous record of 2013 (over 120). In a low-yielding global environment, high-yield securities receive special attention from investors looking to put in huge amounts of liquidity. However, the IMF recently warned that increasing financial leverage could exacerbate existing vulnerabilities in the financial system. At the same time, the FT reported that investors are starting to notice the challenge of conducting proper due diligence on the companies they lend to due to the sheer volume and the short time between launching and closing new deals.

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