Monday, 14 February 2022
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•          Souring risk sentiment during Friday’s US trading session eventually offered some relief for ailing US Treasuries. Ahead of late-session, safe haven rebound, the US Note future approached the post-CPI sell-off low after Michigan consumer confidence showed consumers expecting a 5% inflation rate over the next year. The headline index fell to the lowest since October 2011 as the combination of persistent price pressure, a potentially less supportive fiscal stance and a tighter monetary policy all dampen growth perspectives. In yield terms, the US 10-yr yield failed a sustained break above the psychologic 2% mark in the weekly close. US stocks were already trading heavy before sinking after US National Security Adviser Jake Sullivan said that Russia could initiate military action even before the end of the Winter Olympics (February 20). He added that it can take a variety of forms. It could be more limited, it could be more expansive, but there are very real possibilities that it will involve the seizure of a significant amount of territory in Ukraine and the seizure of major cities including the capital city. Main US equity indices eventually lost 1.4% (Dow) to 2.8% (Nasdaq). The S&P 500 closed below the 4451.5 neckline of a short term double top formation, suggesting a return to the 4222.62/4278.94 support zone (YTD sell-off low & Oct2021 low). Brent crude rose from $90.5/b to $95.5/b. US yields dropped by 7.7 bps (2-yr) to 9.6 bps (5-yr) with the belly of the curve outperforming the wings. The German yield curve still showed a small bear steepening move (0.5 bps for 2-yr; +2.1 bps for 30-yr) because of the timing of the move (after European close). A catch-up move can be expected at today’s opening. Peripheral spreads extended their post-ECB widening trend, adding up to 5 bps for Greece and Italy even as ECB members keep pushing back against very aggressive market pricing regarding policy rates. Irish ECB member Makhlouf in an interview with the FT this weekend for example said that the idea of hiking interest rates in June looks very unrealistic. “There’s a bit of difference between the calendar we’re working to and the one some market participants may have in mind.” The dollar outpowered the euro in the late risk-off spell with EUR/USD closing at 1.135 from an 1.1428 open. The trade weighted dollar managed a first close above the 96 big figure since February 1st. USD/JPY fell from the 116.25 resistance area to 115.33 currently, with JPY obviously the stand-out safe haven currency. EUR/GBP strangely enough followed the EUR/USD move south, to close 0.837 from an 0.8428 open. Risk aversion remains dominant in Asia this morning. The eco calendar is empty suggesting it will be so for the rest of the session.

News Headlines

•          Members of the ruling Polish Law and Justice Party submitted a bill to the Parliament to change a disciplinary chamber of judges that is at the core of the dispute with the EU over the rule of Law. Under the proposed bill, cases of disciplinary action against judges would be transferred to the Supreme Court. The disciplinary chamber will continue to exist but only handle cases involving other legal professions. According to the justification of the bill, the proposal complies with all facets of the Court of Justice of the EU. The proposal probably won’t be considered as a final answer by the EU but could be a basis for further negotiations. The raft between the EU and Poland on rule of law was an obstacle in executing Poland’s €36bn support of the Next Generation EU Recovery package. Last week, Poland’s President Duda also indicated that it wasn’t opportune for Poland to continue this dispute given the international tensions around Ukraine.
•          Rating agency Fitch further cut the credit rating of Turkey into junk territory. The agency lowered the country’s foreign currency issuer default rating to B+ from BB-. The outlook remains negative. According to the agency’s statement ‘Policy-driven financial stress episodes of higher frequency and intensity have increased Turkey's vulnerabilities in terms of high inflation, low external liquidity and weak policy credibility’. Fitch does not expect the authorities' policy response to reduce inflation, including FX-protected deposits, targeted credit and capital flow measures, will sustainably ease macroeconomic and financial stability risks.’


Long term EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected (Q4 2022) amid stubbornly high and even accelerating inflation. The move was driven by higher real rates. The break into positive territory has been confirmed. The German 10-y yield also cleared 0.15% resistance (61.8% 2018-2020 retracement), with 0.40% being the next reference.

The US 10-yr yield took out the October top at 1.7%. The January CPI release triggered a first brief return above 2%. The Fed’s hawkish policy turn triggered a surge in real yields. A 50 bps March rate hike is the most likely scenario. Core bonds and stocks to sell-off in lockstep again?

The ECB changed its tone dramatically. Views on temporary inflation have changed. Net bond buying is poised to end sooner, allowing for a first rate hike later this year. EUR/USD left the lows behind. However, the sharp rise in US yields caps a break beyond 1.15. Some further USD comeback is likely, but we don’t expect a return to the 1.1121 correction low.

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. The odds have turned in favour of EUR/GBP with quite some BoE rate hikes already discounted and the ECB having started the U-turn. The pair tested 0.8282 support but rebounded quickly. The 0.85 big figure is both technically and symbolically important.

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.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
It has not been assessed as to whether or not these insights would be suitable for any particular investor.
Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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