Monday, February 14, 2022

Daily Market Overview

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• There were no important data in the US or EMU today. Even if this had been the case, they probably only had a secondary role to play. The market focus completely shifted from last week’s ‘inflation hype’ to the geopolitical tensions related to the Ukraine conflict. Rumours on imminent military action on Friday from Russia triggered an old-fashioned risk-off repositioning with equities selling off. It also provided a good excuse for at least some investors to take profit on bond-short positions in the wake of an impressive yield rally reinforced by multi-decade high US inflation published earlier last week. The Ukraine inspired risk-off also hit European stocks hard at the open. The EuroStoxx50 soon lost more than 3% and came close to the psychological barrier of 4000. Selling slightly eased, especially on headlines that Russian President Putin gave its Foreign Minister Lavrov the go ahead to continue talks aiming to reach a ‘diplomatic solution’. Still, most European indices are losing 2%+. US equities are opening little changed. On the interest rate markets, the 10-y Bund yield initially declined more than 10 bps points of Friday’s close. However, the safe haven bid gradually eased. German yields currently decline between 4.5 bps (30-y) up to 6.5 bps (5-y). This illustrates the risk-off side of the story. At the same time, EMU swap yields show quite a different picture, holding within reach of last week’s cycle peak levels. Brent oil touching a new cycle top north of $ 95 p/b over the weekend only illustrates that the inflation narrative stays omni-present and potentially even intensifies as the tensions around Ukraine persist. The EMU 10-y swap currently trades near 0.84% compared to a peak of 0.867% end last week. The US bond curve resumes a bear flattening trend after Friday’s risk-off rally with yields rebounding between 9 bps (2-y) and 5.5 bps (10 & 30-y).

• Geopolitical tensions also dominated safe haven related price action on FX markets. The dollar, the yen and the Swiss franc all competed near Friday’s closing levels, with USD/JPY at 115.50, USD/CHF at 0.9252 and CHF/JPY at 124.85. Sterling maintained Friday’s gain against the single currency (EUR/GBP 0.8365) but additional gains were negligible. EUR/USD (1.131) drifted further south and almost touched the 1.13 big figure. In Central Europe, the Czech krone and the zloty due to internal stories (cf infra) decoupled from the broader risk-off. The forint slightly underperformed (EUR/HUF 357.25).

News Headlines

• New Polish central bank policy maker Kotecki in his first interview said there is no alternative than to aggressively tighten monetary policy to tackle high inflation. Growth is faster than expected and wage costs are spiraling. Kotecki said that the government is adding fuel to the fire by having introduced tax cuts from fuels to food that could trigger a delayed surge in prices. He cannot set any terminal policy rate right now. His comments came a few days after the central bank raised rates for a fifth time straight to 2.75%. More hikes are imminent. Polish money market rates added 13 bpn, expecting another 125 bps rate increases over the course of the next three months. The Polish zloty’s intraday reversal strengthened after the comments, bringing EUR/PLN from 4.59 to 4.53.

Czech CPI beat both market and CNB estimates in January. Prices rose at an accelerated 9.9% y/y, coming from 6.6% in December. The increase was broad-based and the result of companies’ new price list reflecting the general strong inflationary environment. The reintroduction of VAT on electricity and gas after being suspended in November and December provided an additional boost, most visible in housing (9.6% m/m!). Travel (10.8% m/m), recreation & culture (3.3% m/m) and hotels & restaurants (3% m/m) are some of the biggest other contributors. The figure puts pressure on the CNB after it suggested the latest rate hike may have been the final one. Markets expect one more 25 bps. This would bring the policy rate to 4.75%. The Czech crown initially failed to profit because of the risk-off settings but currently ekes out a gain to EUR/CZK 25.49 (from 25.56 at Friday’s close) after all.

Graphs & Table

Euro 10-y swap yield holding near cycle top as risk-off doesn’t ease inflationary risks, probably to the contrary…

EuroStoxx 50 nearing 4000 barrier, challenging key neckline support

EUR/USD returns close to 1.13 area as geopolitical tensions dominate global and regional price action

US 2-y yield rebounds as risk-off doesn’t change market expectations on Fed rate path in any profound way.

Note: All times and dates are CET. More reports are available at 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.
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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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