Friday, 4 March 2022
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•          There was still no reason for investors to consider rowing against the ruling risk-off yesterday as there was no evidence on any solution to Russian invasion in Ukraine. Persistent uncertainty on the length and the outcome of the conflict propelled a further rise in a broad range of commodity prices with aggressive price rises in the likes of wheat. The US contract ($12.09 p/bushel) reached the highest level since 2008. Brent briefly touched $120 p/b early in the session but gradually came off the intraday peak levels, amongst others due to rumours that a nuclear deal with Iran might be reached. Logically, eco data again were of little importance. US jobless claims declined more than expected to 215k, but the services ISM delivered quite a big miss, unexpectedly declining from 59.9 to 56.5 with activity indicators showing a broad-based loss of (still-elevated) momentum. Prices paid remain near recent peak levels. As said, the report was no important factor, but didn’t help investor confidence either. In the second part of his hearing before Congress, Fed Chair Powell, reconfirmed that the Fed will start hiking rates this month. However, despite higher inflation, in the current uncertain environment, a cautious start apparently is preferred. US yields changed between + 1.8 bps (2-y) and -3.9 bps (30-y). German yields lost about 1.5 bps at the front end. On FX, the dollar remains in the driver’s seat with DXY closing near 97.78. Yen gains vs USD were close to non-existent (USD/JPY close 115.46). The euro continues fighting an uphill battle with EUR/USD (close 1.1066), EUR/CHF (1.0150) but also EUR/GBP (0.8290) all facing similar downward pressures. CE currencies  (CZK, forint, zloty) all closed substantially lower despite authorities’ efforts to curb the trend (Polish PLN buying, MNB rate hike).

 •         Overnight sentiment deteriorated even further as Russian shelling caused a fire at a major nuclear plant in the east of Ukraine. The damage is said to be ‘under control’. Even so, it illustrates of the broad range of risks potentially resulting from the conflict. Markets are again in outright risk-off modus. Treasury yields are declining up 4-5 bps. Asian equities are losing up to 2.0%. The dollar extends gains. The euro extends its journey south with the 1.10 barrier coming with reach. (currently 1.1025 area). Usually, at the first Friday of the month, market focus is on the US payrolls. A solid report is expected. However, the impact on global markets will probably be limited, maybe with a small asymmetric risk in case of a negative surprise (further risk-off). Yields, equities and the euro will most likely start under substantial downward pressure. Interestingly, oil doesn’t rise any further ($111.50 p/b). For EUR/USD it will be difficult to avoid a break below the 1.10 barrier. From a technical point of view, that would bring the 1.08/1.0636 area again on the radar. EUIR/GBP is sliding below the 0.8277 end 2019 low. For EUR/CHF (1.0125) the parity levels looms on the horizon. In CE, the FX defense of the national banks of Poland, Hungary and the Czech Republic will again be challenged.

News Headlines

•          February inflation in South Korea printed at a higher-than-expected 0.6% m/m to be up at an accelerated 3.7% y/y. Consensus was for a 0.5%/3.5% increase. Higher commodity/oil costs remain a key driver. Core inflation however sped up as well, going from 3% to a decade-high of 3.2% as services costs continued to climb, underscoring demand-side pressures. The central bank in South Korea kept policy rates unchanged at the last meeting at 1.25% but its sharp upward revision of inflation forecasts suggested more hikes to follow soon. Outgoing governor Lee said one more rate hike would not be considered tightening since the degree of accommodation has risen due to inflation.

•          The EU is seeking to remove Russia’s most-favored nation status at the World Trade Organization. Such a move is possible on the basis of the WTO’s national security exemption and would further hit the €95bn Russian exports to its biggest trade partner by slamming it with tariffs. Canada revoked most-favored nation status for Russia and Belarus on Thursday. In the US, lawmakers proposed legislation that seeks to end permanent normal trade relations with Russia and urges president Biden to start the process of suspending the country as WTO member.


Long term (real) EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected. The German 10-y yield jumped to the 0.33 area. However, geopolitics and the fear for higher energy prices to cause a material slowdown, this week sent the 10-y back in negative territory. -0.11% now comes again into play as a first key support.

The Fed’s hawkish policy turn caused a surge in real yields. The January CPI release even triggered a first brief return above 2%. Fed talk since the escalation in the geopolitical narrative suggest policy normalization won’t be delayed. However, safe haven flows caused a return to the 1.70% previous support. For now the supports survives.

The ECB in February dramatically changed its views on temporary inflation. Net bond buying was poised to end sooner (in Q3?), allowing for a first rate hike later this year (Q4). EUR/USD left the lows behind. However, the conflict in Ukraine made investors doubt on the pace of ECB policy normalization. Short-term momentum favors the dollar again. A sustained break of 1.1121/06 would further weaken the picture.

The BoE hiked its policy rate to 0.5% in February with the biggest possible minority even voting for a 50 bps increase. Further tightening is in the pipeline. A first test of the 0.8282 support was rejected, but broad euro weakness currently puts the end 2019 low again under pressure.

Calendar & Table

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This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA).
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