Tuesday, 15 February 2022
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•          European stock markets closed 2%-2.5% lower, but off worst intraday levels following headlines that Russian President Putin gave his Foreign Minister Lavrov the go ahead to continue talks aiming to reach a ‘diplomatic solution’ in the Ukrainian conflict. US stock markets hesitated after Friday’s beating with main indices closing between flat (Nasdaq) and -0.5% (Dow). Technical pictures of key European and US equity gauges are still extremely fragile and at risk of deteriorating further. US Treasuries fell prey to short covering ahead of the weekend, but that move didn’t persist yesterday. It is telling for the strength of the underlying bear flattening trend. US yield added 7.3 bps (2-yr) to 4.7 bps (30-yr). The US 7-yr yield even closed marginally above the US 10-yr yield. The German yield curve bull steepened with daily yield changes falling up to 3.9 bps for the 5-yr. This is mainly a catch-up effect from Friday’s moves after European close. Intraday dynamics also showed that any rebound in German Bunds didn’t went that far, again telling something about the ongoing core bond sell-off as global central banks are behind the curve in tackling the inflation problem. 10-yr yield spread changes vs Germany widened by up to 3 bps. The Japanese yen and the US dollar kept each other in balance yesterday with a close around 115.50 though the balance is again tipping in favour of JPY this morning. EUR/USD closed at 1.1307 and sits perfectly in the middle of the broad 1.1121-1.1483 trading band. EUR/GBP followed the move south in EUR/USD to close at 0.8357. UK labour market data this morning printed too close to consensus to influence trading. The unemployment rate stabilized at 4.1% in the Oct-Dec period compared to Sep-Nov. Employment over that period declined by 38k vs the consensus estimate of -58k. January data nevertheless indicated a 31.9k decline in jobless claims with payrolls rising by 108k. Labour market data don’t alter the BoE’s normalization plans.
•          Today’s eco calendar contains German ZEW investor sentiment and the US February Empire Manufacturing Survey. We think they’ll play second fiddle and keep our focus on general risk sentiment. The Kingdom of Belgium will issue a new long 30y benchmark via syndication (OLO 95 June2053). It’s the second syndicated deal following a €5bn 10-yr benchmark mid-January (OLO 94 0.35% June2032). This year’s funding plan consists of raising €41.2bn in OLO funding to cover the lion share of the €48.28bn gross borrowing requirement. A New Green OLO remains in the pipeline for later this year.

News Headlines

•          The Japanese economy rebounded in Q4 at an 5.4% Q/Q annualized pace (1.3.% Q/Q) from an upwardly revised 2.7% Q/Qa contraction in the previous quarter. The outcome was slightly below expectations but the details were fairly constructive. Private consumption (+2.7% Q/Q) was the main driver as spending rebounded. However, the Omicron variant is again negatively affecting activity in the current quarter. Capital spending rose 0.4% Q/Q. Net exports made a positive contribution to growth of 0.2 ppt indicating a solid export performance. Inventory adjustment subtracted 0.1 ppt. Even after the Q4 rebound, Japanese activity is still slightly below its pre-pandemic level. The resurgence of the Omicron, higher prices and uncertainty on the impact of the Ukraine crisis might slow activity this quarter even as public spending will be a supportive. The 10-yr government bond yield (0.215%) remains well below the 0.25% level that the BoJ indicated it wants to defend last week. The yen strengthens slightly this morning with USD/JPY trading at 115.35.
•          Iron future contracts in Asia declined about 10% this morning, the second consecutive day of substantial losses. The decline comes as Chinese authorities indicated that they want to take action to address a spread of misinformation on prices. They warn iron are trading companies not to speculate, hoard or hike prices. Chinese authorities (state planner) are also reported to plan meetings with trading companies to ensure a smooth operation of trading in the commodity. The reference contract end last week touched the highest level since early August last year.


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

Note: All times and dates are CET. More reports are available at KBCEconomics.be which you may sign up to.

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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