Sunset

Thursday, March 17, 2022

Daily Market Overview

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Markets

• The Bank of England hiked its policy rate for a third consecutive meeting by 25 bps, from 0.50% to 0.75%. The policy rate now equals the one in place when Covid struck. Unlike the February meeting, none of the BoE-governors (from 4) voted in favour of a 50 bps move. On the contrary, BoE Cunliffe backed an unchanged policy rate in an 8-1 vote. Compared with the February Monetary Policy Report, inflation is now expected to be higher because of the spike in energy and commodity (including food) prices due to the Russian invasion in Ukraine. The BoE sees inflation peaking around 8% in Q2 or perhaps even higher later this year. The compares to a previous peak projection of 7.25% in April. Simultaneously, the drag on economic growth (squeeze on real household disposable incomes) will be larger. In balancing those two developments, the Bank of England toned down its forward guidance on policy rates. The committee now judges that some further modest tightening may be appropriate in the coming months, whereas previously they referred to additional tightening as being likely. An extensive growth/inflation update will be available in the May 5 Monetary Policy Report. UK (rate) markets ran ahead of themselves going into today’s verdict and fall prey to correction. The UK yield curve bull steepens with yields sliding by 1.7 bps (30-yr) to 10.5 bps (2-yr). End-of-year policy rate expectations fell from 2.16% to 2%. Sterling suffered from the loss of interest rate support. Gains in EUR/GBP are technically insignificant though with the pair changing hands just below 0.8450 up from 0.8370 ahead of the decision. First minor resistance stands at the YTD high of EUR/GBP 0.8478. Cable is back in the defensive after bouncing off the psychological 1.30 mark earlier this week. The pair holds just above 1.31.
 
• Global markets digested yesterday’s policy rate lift-off by the Fed. The 25 bps rate was accompanied by guidance to continue hiking every meeting this year and next until policy rates hit a slightly restrictive 2.75%. Details on the pace of the balance sheet run-off will be published in May. The aggressive Fed stance was more or less in line with market expectations. US yields slide 1.3 bps (30-yr) to 4.8 bps (5-yr) today with the belly of the curve outperforming the wings. The corrective action comes after yesterday’s bear flattener. Changes on the German curve are confined to +- 1 bp. European stock markets took a brief scare after the Kremlin labelled reports of major progress in Ukraine talks as fake news. Main benchmarks lose 0.5% to 1%. EUR/USD extends the post-FOMC rebound to 1.1087. First support stands at 1.1121. The market finally believes that the ECB has the single currency’s back.
 
News Headlines

The Turkish central bank stood pat on policy rates, keeping them at 14% for a third month straight. The status quo was expected but is nevertheless at odds with spiraling inflation that reached a new two-decade high at 54.4% in February – elevenfold the CBRT’s 5% target. As a net energy/commodity importer, inflation in Turkey is bound to rise further in coming months due to the sharp price increases in recent weeks/months. According to the CBRT, this is a temporary effect in addition to other transitory cost-push elements stemming from supply side factors and ‘pricing formations that are not supported by economic fundamentals’, i.e. the major slide of the Turkish lira. One important change in the central bank statement is the omittance of it expecting a positive current account this year. A surplus is viewed as key to price stability but soaring commodity prices have widened the trade gap. The Turkish lira lost both vs the USD (USD/TRY 14.78) and the euro (EUR/TRY 16.34) after the decision.
 
Russia’s finance ministry said in a statement a $117 million interest payment on two dollar bonds was transferred to the corresponding bank yesterday. But so far, the bondholders have received no sign of the funds. Starting from today, a 30-day grace period kicks in. if Russia’s creditors do not get the cash within that period, it would be the first complete external default since 1918. In 1998’s debt restructuring, Russia defaulted on domestic bonds and on some Soviet-era dollar bonds but kept paying coupons on post-Soviet era FX bonds.
 

Graphs & Table

EUR/GBP: sterling loses interest rate support as BoE toned down forward guidance of hiking cycle

EuroStoxx50: rebound slightly dented on Kremlin reports

UK 2-yr yield: there’s that unreliable boyfriend again

Brent crude: correction lower stops at $100/b

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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