Monday, 14 March 2022
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•          Markets were mostly chewing on the ECB’s message during Friday’s European trading session. Behind doors stories emerged suggesting a broadly 15-10 split in favour of the more hawkish ECB flank. Especially the significant rise in market-based inflation expectations since the early February meeting supposedly tilted the balance. The EU 10y inflation swap for example surged from near 2% to a peak of 2.8%. European yields remained in the lift with the EU 2y swap rate setting a new multiyear high above 0.25% and the 10y benchmark testing the psychologic 1% mark. Trading dynamics changed over US trading hours when risk sentiment turned risk-off again, providing a bid especially for longer dated bonds. The EMU swap curve flattened with daily changes ranging between +2.9 bps (3-yr) and -2.2 bps (30-yr). German Bunds outperformed with the curve bull flattening (yields dropping 2.1 bps to 3.4 bps). US Treasuries underperformed in the run-up to this week’s FOMC meeting with daily changes from +5.2 bps (2-yr) to -1.3 bps (30-yr). EUR/USD during the US session tanked from an intraday high around 1.1040 to a close just north of 1.09. Key US stock market benchmarks lost over 2% for the Nasdaq compared with positive closing levels in Europe.
•          Asian bourses trade mixed this morning with China significantly underperforming after the country placed the southern city of Shenzhen (technology hub) into lockdown for at least a weak. The dollar’s strength is again most outspoken in the USD/JPY combination. The pair on Friday broke above 116.35 resistance and this morning closes in on the 118 big figure for the first time since end 2016. Next resistance stands at 118.66 (2016 top). Reuters already reports that the Japanese government stresses the importance of the a stable currency and that it is eying the impact of a significantly softer yen on the economy.
•          In a broader context, there’s little to add on the situation in Ukraine. From a market perspective, this implies no reason to exit the better safe than sorry thinking. The eco calendar is empty today with market focus on this week’s monetary policy meetings in the US and in the UK. Markets no longer contemplate a 50 bps Fed rate lift-off and discount a 25 bps move. Indications on the (speed of the) balance sheet run-off, the terminal rate and the number of follow-up rate hikes to tackle decade-high US inflation will be key further out. In any case, we think that (global) policy normalization continues to serve as strong counterweight against potential upticks in risk aversion. This suggests a persistent fragile stock market environment and more weakness for core bonds. The jury in FX space remains out. The ECB in theory solidified the floor below EUR/USD medium term, but in a short term perspective the dollar could hold the upper hand. Support stands at 1.0806 (2022 low) and 1.0636 (2020 low).

News Headlines

•          In an interview on Sunday, Russian Finance Minister Siluanov said his country lost access to around $300bn of its total $640bn gold and FX reserves due to sanctions imposed by Western countries. In this context, the Minister said that Russia will continue to fulfil its debt obligations. However he indicated that the country will pay roubles to its debt holders, rather than in USD or other currencies until the state reserves are made free again. Russia also looks for support from China as the West is putting pressure on China to limit access to reserves in yuan. Today, the US National Security adviser Jake Sullivan will meet in Rome with a top diplomat of the Chinese Polit bureau.
•          Corona infections continue to impact life and economic activity in China. Chinese authorities have imposed a lockdown on the City of Shenzhen, home to a about 17.5 mln people. The region is an important Tech hub. So the lockdown may cause additional supply issues. Covid cases in the country are also rising again in several other cities, including Shanghai. The impact on activity raises the chances that the PBOC will ease policy further in the near future. End last week, February credit data in China slowed more than expected.


European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter. Real yields may further bottom out while inflation expectations may ease but will probably remain elevated. After swiftly returning above the 0.14%-0.16% area, the recovery high is back in focus.

Fed talk since the geopolitical escalation suggests policy normalization to fight consistently high inflation won’t be delayed. Real yields declined but 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 not too far away.

EUR/USD tested the 1.08 pandemic support zone but survived. A subsequent short squeeze propelled the pair then back to 1.10. The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. In a longer term perspective, it protects EUR/USD’s downside.

Sterling proves no longer resilient to the uncertain risk environment. Combined with new-found euro vigor, EUR/GBP took out the first resistances between 0.82 and 0.83. A return above 0.845/72 would bring the pair back in the sideways trading range that dominated 2021. Regarding monetary policy, the balance after the March ECB meeting turned more even.

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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