Thursday, 24 March 2022
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•          Yesterday, markets (temporarily?) returned to a ‘classic’ risk-off script, with equities declining and bonds rebounding. We see the move meanly as a technical correction. The bond market sell-off apparently was ripe for a pause as markets became well aware that the Fed is prepared to front-load its hiking cycle with 50 bps rate hikes in May and/or possibly in June if (inflation) data force them to do so. Still, with oil prices jumping and inflation expectations still rising (10-y TIPS inflation expectations are again near the cycle peak near 3.0%) a sustained bond rebound isn’t evident, not even in case of a further risk-off. Even so, a US Treasury $16 bln 20-y auction (2.651%) attracted very strong investor interest and supported the intraday bond market momentum. US yields eased between 6.8 bps (2-y) and 11.7 bps (30-y), outperforming German Bunds. In a bull flattening move, German yields lost between 1.8 bps (2-y) and 5.3 bps (30-y). Russian President Putin preparing an order that foreign clients will have pay Russian energy in ruble again raised tensions and triggered equity losses. Brent oil rebounded north of $120 p/b. US equities lost about 1.30%. The Eurostoxx50 finished with a loss of 1.45%. The dollar gained, but only modestly (DXY 98.62). EUR/USD temporarily dropped to the 1.0965 area but at the end damage was contained (close 1.1004). Higher oil prices also aborted a tentative intraday rebound of the yen (USD/JPY close 121.15). Sterling didn’t profit even as UK Fin Min Sunak in its Spring Budget statement announcement a bigger than expected fiscal relief to mitigate the sharp deterioration in UK living standards. However with yields declining and markets in risk-off modus, it didn’t help sterling. EUR/GBP even closed marginally higher in a daily perspective (0.8332 from 0.8316).  

•          Asian equities are trading mixed despite yesterday’s WS correction. US yields are reversing part of yesterday’s decline. The dollar is in the driver’s seat (DXY 98.84; EUR/USD 1.0984). Oil is holding north of $120 p/b. In ‘normal’ circumstances, the EMU PMI’s would take center stage to assess the impact of higher prices on growth. The EMU composite PMI is expected at 53.5 from 55.5. Risks probably are to the downside. However, with commodity prices rising, persistent supply bottlenecks and growing signs of second round effects, central bankers have to keep the focus on inflation. So, further bond losses are likely even in case of a risk-off. Next reference for the EMU 10-y swap rate and the 10-y Bund yield are at 1.19% and 0.58% respectively. On FX markets, the dollar retains the benefit of the doubt. A return to EUR/USD 1.0806 remains possible. We look out whether a deal  between the US and Europe on energy supply might help to bring back some calm to especially European (equity) markets and/or the euro.

News Headlines

•          The Japanese composite PMI bounced back from 45.8 in February to 49.3 in March, but stays below the 50 boom/bust level. Details showed a similar picture for the services PMI (48.7 from 44.2) while the manufacturing PMI pointed to slightly stronger growth at 53.2 from 52.7. The near return to growth in domestic services is linked to declining Covid-cases and the lifting of the quasi-state of emergency across Japan. Firms across the private sector reported a further intensification of price pressures with input prices rising at the fastest pace since August 2008. Uncertainty around war in Ukraine pushed the year-ahead outlook to a 14-month low despite falling Covid-infection rates. The yen didn’t respond to the data. JPY yesterday and this morning failed to fight back despite risk-off settings. Rising global yields, the BoJ’s easy monetary policy stance and surging energy prices strangle JPY. USD/JPY closes in on the 2016 top of 121.69 which serves as final resistance ahead of the 2015 (multi-year) high at 125.86.

•          US President Biden national security adviser Sullivan said that an agreement to ensure supplies of American natural gas and hydrogen for Europe will be announced tomorrow. The deal is aimed at reducing dependence of Russian energy sources. EC president von der Leyen suggested that she aims for a commitment for additional (LNG) supplies for the next two winters. US President Biden travelled to Brussels for meetings with NATO, the G7 and EU leaders. While Europe is searching for alternative energy sources, German Chancellor Scholz in parliament stressed that an immediate Russian embargo is off the table as it would plunge the whole of Europe into recession. “Sanctions must not hit European states harder than Russian leadership”.


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 will probably remain elevated. Next resistance stands at 0.58%.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Medium term, the sell-off on core bond markets isn’t over.

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 even as the Fed conducted its policy rate lift-off. US (real) policy rates remain deeply negative.

Sterling proves no longer resilient to the uncertain risk environment. EUR/GBP took out the first resistances between 0.82 and 0.83. However, a rebound above 0.8478 YTD top was a step too far. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. BoE’s dovish turn.

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.
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