Monday, 21 February 2022
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•          The Ukrainian conflict with Russia continued to set the tone on financial markets. Reports of some 190k troops having amassed near Ukraine’s borders shattered market hopes for a diplomatic way out even as the US’s and Russia’s foreign ministers agreed to talk further this week. European stocks eased about 1%. The Nasdaq (-1.23%) underperformed in the US ahead of the long weekend (US on Monday closed for President’s Day). Core bonds gained with the German Bund outperforming despite more ECB members (Kazimir, Vasle) arguing for faster policy normalization. The curve bull steepened with yields dropping 4.9-5.6 bps in the 2y-5y and 3.9 bps in the 10y. The latter neared a first support level just below 0.20%. US yields fell -0.1 bps (2y) to -5.2 bps (30y) in a bull flattening move. As with core bonds, the US dollar enjoyed save haven flows too, appreciating vs most peers. The trade-weighted DXY rose to 96.04. EUR/USD slid from 1.136 to 1.132. Other haven currencies including the yen and the Swiss franc mostly gained too. Strong UK retail sales concluded the economic update last week. The BoE is poised to hike further but much (if not all) has been discounted already. The pound gained against the euro amid risk-off nevertheless and continues to be a EUR/USD copycat. EUR/GBP drifted towards 0.833.

•          Japanese PMI confidence this morning came in weak amid Omicron-related restrictions (see below). The trading session is dominated however by … news on the geopolitical front. President Biden and Putin agreed to their French counterpart Macron’s proposal to meet. Most Asian-Pacific stocks still trade in the red but significantly paired the much bigger losses at the open. European futures inches half a percent higher. US Treasuries’ and German Bund’s gains evaporated. The dollar is under pressure. EUR/USD is able to recoup all of Friday’s losses (1.137). USD/JPY doesn’t make it above 115 though.

•          Focus turns to Europe today since the US remains closed. February PMIs in the region are likely to improve with earlier Covid restrictions having been reversed in many countries. At this time in the cycle, activity data such as the PMIs usually get more market attention but we have to admit that this hasn’t been so much the case yet. We’re keen to see whether that starts to change. A good reading in any case may reinforce current market optimism. We must add, though, that risk sentiment is very much ebbing and flowing according to the geopolitical headline of the day. Core bond yields may recover from Friday’s hit. We look for Germany’s 10y and the European 10y swap yield to find support at 0.188% and 0.77% respectively. The euro should be capable of at least maintaining current gains vs the dollar and sterling. First resistance in EUR/USD situates at 1.1386.

News Headlines

•          Japanese February PMI’s deteriorated significantly. The composite PMI fell from 49.9 to 44.6 with both manufacturing (52.9 from 55.4) and services (42.7 from 47.6) contributing. It’s the sharpest decline in 20 months. The omicron variant of the Covid-19 virus led to record case numbers and renewed restrictions in Japan in February. Details were weaker across the board with stronger declining output, lower orders and a weaker, though still positive, outlook. Rising input prices and material shortages, notably in fuel and metals continued to dampen private sector activity. Last month saw the strongest rise in average cost burdens since August 2008. The Japanese yen doesn’t budge this morning near USD/JPY 115.

•          Australian February PMI’s marked a stark contrast with the Japanese numbers. The composite PMI rebounded from 46.7 to 55.9, especially driven by the services sector (56.4 from 46.6). The manufacturing gauge rose further from 55.1 to 57.6. The easing of the (January) Omicron wave enabled a rapid return to growth for the Australian private sector. Demand and output both recovered, boding well for hiring activity in February. Shortages of input materials and labour persisted as issues for private sector firms, leading to a continued sharp increase of input prices. Selling price inflation hit a record in February. The Aussie dollar gains this morning with AUD/USD moving from 0.7170 to 0.7220 in a generally positive risk climate.


Long term EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected amid 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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