Tuesday, 22 February 2022
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•          Geopolitics completely overshadowed strong and promising European PMI business confidence (from 52.3 to 55.8 on a rebound in services). The Kremlin dashed early optimism on a potential Biden-Putin summit, calling it premature and unconfirmed. Tensions near the Ukrainian border instead intensified. Russian assets were dumped: the ruble lost more than 3% vs the euro and the dollar, the Moscow exchange index tanked a whopping 10% (intraday even 16%) and CDS spreads jumped several tens of bps. Oil prices rose about 2% (Brent closed at $95.39/b) as supply worries mount. Risk-off held sway on European markets as well with equities losing more than 2%. The Swiss franc outperformed. Safe haven bids pummeled EUR/CHF back below 1.04. The Japanese yen came in second (USD/JPY 114.74, EUR/JPY 129.79). EUR/USD drifted lower to the low 1.13 area. The euro also lost out against sterling with EUR/GBP easing from 0.834 to 0.831. German yields erased a part of their opening gains. The curve bear flattened with yields 1.4 bps (10y) to 2.4 bps (2y) higher. The US bond (and equity) market faces a rude awakening after a long weekend (closed yesterday for President’s Day). Russian president Putin held a long speech yesterday evening that eventually lead him signing decrees recognizing two self-proclaimed separatist republics in the Donetsk and Luhansk regions in eastern Ukraine. With the order, Putin also send “peacekeeping forces” to the regions. It’s a dramatic escalation in the stand-off with the US and its allies warning Russia may take it a step further. Countries including the US, Canada and the UK have already announced sanctions. US bond yields decline up to 6.2 bps (10y) this morning. This morning’s price action in the Bund future is interesting though. It traded for most of the Asian session a tad below yesterday’s close. Further rising oil prices (2-3%) and the impact it could have on inflation is providing counterweight. In a similar peculiar move, safe haven currencies fail to profit from the heightened uncertainty.
•          The economic calendar (Conference Board consumer confidence in the US and the Ifo indicator in Germany) remains subordinated to geopolitical developments. Another classic risk-off session in theory provides a fertile breeding ground for core bonds. We keep the lackluster (Bund) performance in Asian dealings at the back of our minds though. First meaningful support in the German 10y yield stands at around 0.15%. We are looking at the 1.80% area in the US 10y. The dollar should profit but its recent performance isn’t that convincing either. EUR/USD is currently trying to keep the 1.13 alive. A break lower brings 1.123 and next 1.1186 back on the radar. EUR/GBP is trading in the 0.832 area.

News Headlines

•          A Bloomberg article refers to a report by the advisory board to Germany’s finance ministry which argues in favour moderately extending debt maturities in order to increase planning security in the budget and reduce risks. In the report they stress that Germany’s tendency to issue mainly short-term bonds has been a cheap strategy, but comes with risks attached in rising interest rate environment. Longer maturities on the other hand help to stabilize tax and spending policies and decouple them from mortgage savings. Additionally, they also increase crisis resilience if, for example, there were financial problems in the euro area.
•          ECB governing council member Villeroy repeated his call to end net asset purchases around the third quarter of this year in an interview with French newspaper Liberation. Afterwards, the timing of events depends much on how inflation evolves. There’s no point deciding now on the future date of interest rate increases, he argues. Time is essential to avoid errors: action must be neither taken too late, at risk of letting inflation get out of control, not too early, at risk of putting the brakes on the recovery.


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

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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