KBC Sunset Market Commentary 21/03/2022 via Trader Talent

• Brent crude prices rallied further today, gaining around 6% as the EU contemplates taking draconic action against Russia in the form of banning energy imports. The oil price rises from $108/b to $114/b. Ukraine rejected Russia’s ultimatum to surrender the port city of Mariupol. It’s telling that German economy minister Habeck this weekend announced after talks in Doha that both countries’ commercial entities would re-engage and progress discussions on long term LNG supplies from Qatar to Germany. Higher energy prices, but commodity prices bar Nickel in general, continue to feed through in rising bond yields via inflation expectations. The latter is especially true for Europe. The German yield curve bear steepens with yield adding 3.4 bps (2-yr) to 8 bps (30-yr). The German 10-yr yield pushes beyond last week’s top around 0.40% (76% retracement on 2018/2020 decline) to currently reach 0.44%. Final intermediate resistance ahead of the 0.81% 2018 top stands at 0.58%. The EU 10y swap rate at 1.07% has the 2018 top at 1.19% already within reach. ECB President Lagarde at a speech didn’t comment directly on monetary policy, but said that even in the gloomiest ECB scenario, the EMU would still record positive growth levels this year despite the war in Ukraine. It suggests no immediate backing down on the recently started battle to tackle inflation. US yields add 6.5 bps (30-yr) to 8.8 bps (5-yr) with the belly of the curve outperforming the wings. The US 10-yr yield is testing the recovery top at 2.23%. Non-voting Atlanta Fed Bostic gave some personal views following last week’s FOMC meeting. He favours six rate increases in total over 2022 and two more in 2023. His preference would be moving quickly on the balance sheet to complement rate hikes. Should the inflation outlook deteriorate even further, he would also be willing to lift policy rates above neutral by hiking in steps of >25 bps. Trading on FX markets is rather muted compared with action on bond markets. EUR/USD switches sides around the 1.1050 handle. Sterling marginally outperforms with EUR/GBP diving from 0.84 towards 0.8370. UK Gilts today underperformed German Bunds with UK yields adding 8.3 bps (2-yr) to 11.7 bps (10-yr).
 
• The Belgian debt agency today conducted its first regular monthly tap auction after January and February plans were annulled because of syndicated deals. They raised a combined €3.1bn today (upper end of €2.3-3.1bn target range) by selling OLO 87 (€0.81bn Jun2029), OLO 94 (€1.52bn Jun2032) and OLO 90 (€0.8bn Jun2040). The auction bid cover was a solid 2.39. The Belgian debt agency now completed around 32% of this year’s €41.2bn OLO funding need.
 
News Headlines

• The Czech koruna is enjoying a good bid today, outperforming not only regional but many of its global peers. EUR/CZK declines (CZK strengthens) from Friday’s close at 24.87 to 24.68 in the wake of CNB governor Rusnok’s televised interview on Sunday. He said board members will discuss whether to put the enormous FX reserves to work and use them as an additional monetary policy tool to primarily prevent the koruna from excessive depreciation. Rusnok said they will also discuss to take it a step further, selling reserves not only to stabilize the CZK but also to strengthen it temporarily and use it as an anti-inflationary tool. Inflation soared to 11.1% in February, miles above the 2% (+1 ppt margin) target. The CNB has jacked up policy rates by 425 bps to 4.5% in response. The next policy meeting takes place on March 31.
 
• The chip supply shortage is moving higher in the chain. As a result of exceptionally strong global chip demand, manufacturers are seeking to significantly expand production capacity. But these expansion plans are facing hurdles themselves, with equipment to produce chips running short over an estimated next two years. Industry leaders referred in an interview with the Financial Times to one crucial component, the lens, which aside from the time needed to build clean rooms, ask for permits, start building the factory, hire people etc., takes more than 12 months just to make it.