Tuesday, 15 March 2022
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•          US stock markets again failed to cling to opening gains, ending up to 2% lower for Nasdaq. The S&P 500 follows the two other major indices in painting a technical “death cross” on the charts (200d moving average < 50d moving average), suggesting more downside. The tech giant Nasdaq now entered bear market territory as the index is now more than 20% below the all-time high in November 2021. The (US) stock sell-off again went hand-in-hand with sales in US Treasuries. This correlation suggests that runaway inflation and global (monetary) policy normalization are firmly back in the driver’s seat as market theme. At the height of the Russian invasion, global core bonds briefly played their role as safe haven asset. In the wake of last week’s ECB meeting and going into this week’s Fed and BoE gatherings, investors are again scaling up their normalization/tightening bets. US yields added 11.3 bps (2-yr) to 15 bps (7-yr) with the belly of the curve underperforming the wings. US yields reached multi-year highs at the 2-to-10 sector of the curve. The German yield curve bear steepened with yields adding 6.5 bps (2-yr) to 12.3 bps (30-yr) higher. The German 10-yr yield set a new recovery high at 0.37%. Next technical resistance stands at 0.58%. Peripheral yield spreads remarkably kept stable. The single currency slightly had the upper hand over the dollar and sterling. EUR/USD and EUR/GBP ended the day slightly firmer at respectively 1.0940 and 0.8415. Moves continue this morning. USD/JPY extends it’s race to the top with the pair closing above 118 for the first time since early 2017. Next high profile resistance at 118.66 is nearby. It’s the final big hurdle ahead of the 2015 top at 125.86. JPY is the stand-out loser in the normalization race, after being hit by the commodity rally at the height of the Russian war in Ukraine. EUR/CHF extends its rebound higher after briefly touching parity last week. EUR/CHF trades back above 1.03. CEE currencies enjoyed a huge relief rally.

•          Chinese assets remain in freefall this morning. Apart from new strict lockdowns and tougher regulation, they react disappointed as the PBOC refrained from easing monetary policy further (see below). The damage again remains confined to China. Today’s eco calendar contains US PPI data, empire manufacturing survey and EMU production figures. They won’t alter reigning trading dynamics ahead of the Fed meeting. UK labour market data printed strong this morning. Wage growth accelerated further with February payrolls suggesting renewed vigour for the labour market after some stabilization around the turn of the year. The unemployment rate slid further to 3.9% in the Nov-Jan period, the lowest since January 2020. The data strengthen the case for another BoE rate hike later this week.

News Headlines

•          The February Chinese economic update came in better than expected as government support started kicking in. Industrial production rose 7.5% vs 4% expected in the first two months of the year compared to the same period in 2021. Retail sales grew 6.7% YtD, beating the 3% consensus. Property investments defied expectations of a 7% decline to be up 3.7% and fixed assets investments jumped 12.2%. The strength of this month’s data may have been the reason for the PBOC to surprise markets and to not cut rates on the 1-yr lending facility this morning (2.85%). But downside risks loom large, ranging from the regulatory crackdown over the reintroduction of lockdowns to fall-out of the war (commodity prices). The data also highlight the ongoing housing market cooldown as residential property sales slump more than 22% YtD, adding to the economic risks. The Chinese yuan extends a recent losing streak to trade at the weakest level since the start of the year at USD/CNY 6.38.

•          The EU agreed on a fourth package of sanctions against Russia after several days of heavy debating. Measures include banning the sale to Russia of luxury goods worth more than €300 and of luxury cars, boats and planes of more than €50 000, Bloomberg reported based on a draft. Purchases of many Russian steel and iron (finished) products will also be banned as well as new investments in Russian energy projects. There are exemptions included. For example, the new package does not target transactions needed for purchasing or transporting Russian fossil fuels nor are titanium, aluminum, copper, nickel, palladium and iron ore subject to the restrictions.


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. New recovery high in the run-up to the Fed meeting with next resistance at 0.58%.

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%). Fasten your seatbelts for Wednesday.

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. It protects EUR/USD’s downside in the current uncertain circumstances.

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

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.
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