Wednesday, 9 March 2022
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•          Yesterday’s news of the day undoubtably came from Bloomberg. The news agency ran a story about the European Union discussing plans to jointly issue bonds to finance defense spending and take up a notch or two in the energy transition. The proposal is in its early stages and other than it may happen on a “potentially massive scale” and may be presented after an informal EU summit later this week, not much is known. The market reaction was similar to what we’ve seen when the EU announced its pandemic recovery fund (NextGenEU). European/German bond markets in particular saw large moves. The German curve bear steepened with changes ranging from 6.7 bps (2y) to 14 bps (30y). The 10y yield rose 12.7 bps with about half of the move driven by real yields. European swap yields rose 5.9 bps at the front end to 10.5 bps (10y). US yields rose in sympathy, adding 4.8 bps (2y) to 7.2 bps (10y). The euro rebounded from the 2020 lows at 1.085 to just shy of 1.09. For a more significant upleg, the common currency needs more concrete guidance on the plans. EUR/GBP finished above 0.83(2). Central-European currencies had a good run, in a move driven largely by a generally constructive sentiment. The Polish zloty outperformed regional peers. Its central bank also raised policy rates more than expected (see below). Commodity prices rose further but in a less broad-based manner compared to the previous days. Oil stood out (+4% in Brent, $128) after the US decided to ban Russian imports effective immediate. The UK said it would phase out Russian crude by the end of the year.
 •         Stocks in Asian dealings trade mixed with China (-1.5%) underperforming. Inflation in the country as expected stabilized at 0.9% y/y in February. Producer price inflation eased for a fourth month straight to be at a still-high 8.80%. The Chinese yuan trades little changed around USD/CNY 6.32. Most other currencies trade quietly. The euro gets a slight advantage as European equity markets look set for a nice open in the green (+1.8%). EUR/USD inches above 1.09. EUR/JPY extends yesterday’s rebound from 125.16 to well above 126(.4) today. EUR/CHF tries to leave parity further behind (1.0137). Core bonds are looking for direction after taking a blow yesterday.
•          Markets today will be counting down to the ECB meeting on Thursday, even as the high-profile event has been overshadowed by geopolitics. The war in Ukraine obviously serves as the running story with the ability of causing sudden volatility. For the time being though and in the absence of such war headlines, sentiment looks good. It may keep core bond yields’ downside protected, also in Europe after yesterday’s Bloomberg report. EUR/USD could enjoy a minor bid. From a technical perspective, it still has some way to go. The EUR/USD 1.10 area acts as a first resistance but for the downside alert to be called off, the pair should at least take out 1,11 first. The first downside reference is situated at 1.078.

News Headlines

•          The National  Bank of Poland (NBP) yesterday raised its main reference rate by 75 bps to 3.50%, more than the 50 bps expected by analysts. The NBP assessed the economic situation in Poland at the start of the year as favourable, but the military action in Ukraine is a significant factor of uncertainty. According to March inflation and GDP forecasts, the NBP sees 2022 and 2023 inflation at 9.3%-12.2% and 7%-11 respectively, sharply higher from November. Inflation will return to 2.8%-5.7% in 2024. Growth for this and next year is expected lower between 3.4%-5.3% and 1.9%-4.1%. The NBP acknowledged that a risk persists that inflation will be running of the NBP target over the monetary transmission horizon but gave little guidance on the pace of further rate hikes. The NBP will also take necessary action to ensure macroeconomic and financial stability. It may intervene in the FX market to limit fluctuations of the zloty that are said to be inconsistent with de direction of monetary policy and not in line with the fundamentals of the Polish economy. The zloty, which had profited early in the session from the headlines on a possible EU financing plan, hardly gained further ground post the NBP decision and closed the day at 4.895.


Geopolitics and the fear for higher energy prices to cause a material economic slowdown hijacked the ECB normalisation narrative for the time being. Real yields tumbled to new historic lows but soaring inflation expectations provide counterweight. Germany’s 10y yield trip below 0% again ended soon. A return above 0.14%-0.16% area is needed to call off the immediate downside alert.

Fed talk since the geopolitical escalation suggests policy normalization to fight consistently high inflation won’t be delayed. Real yields avoided new record lows. Spiraling energy prices put inflation expectations on an upward path in the US too (>3%). The previous cycle highs in nominal yields are thus not too far away.

The euro is in dire straits, suffering more than most other currencies from the conflict at the eastern European borders. Markets have pared back ECB normalization bets. The monetary policy spread as well as dollar safe haven flows caused EUR/USD to stumble to the lowest levels since March 2020. The break below 1.1121/06 paves the way towards that 1.06/08 pandemic support zone.

Testament to euro weakness is EUR/GBP in times of risk-off. The pair tested and temporarily (?) broke below 0.8282 support to hit the lowest levels since 2016. Regarding monetary policy, the BoE hiked its policy rate to 0.5% in February with further tightening in the pipeline.

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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
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