Sunset

Wednesday, March 23, 2022

Daily Market Overview

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Markets

• A lot of eyes were on UK Finance Minister Sunak and his spring statement on the budget and the economy. The UK cost of living crisis worsened with inflation having accelerated to a faster-than-expected 6.2% y/y (5.2% core) in February, data showed ahead of Sunak’s update. He wants to alleviate some of the income squeeze by announcing the biggest ever fuel-duty cut until March next year in a tax cut worth £5bn. Sunak also removes the 5% VAT on the installation of some energy saving investments, doubles household support and, as widely expected, raises the threshold at which people pay National Insurance by £3000 instead of the previously planned 300 pounds. The latter is in effect a (£6bn personal) tax cut for low earners and is due to kick in next month. Sunak also announces a cut in the basic income tax to 19% by election year 2024 and promised to cut taxes for business investment in the fall. The measures widen the deficit forecast for FY 22/23. For the coming five years however, the Office for Budget Responsibility has cut the deficit forecast by £29bn. Combined with the OBR expecting “only” £125bn of bond sales in 2022/2023 compared to market estimates of £152bn and slashed growth estimates (3.8% vs 6% in 2022), UK yields in a kneejerk move declined 9.8 bps (10y) to 13.3 bps (2y). Losses are being limited to around 5 bps in the meantime. Market’s monetary policy expectations were unaltered after Sunak’s update, sticking to five more hikes by the end of the year. EUR/GBP hit the 0.83 big figure in early trading but prevented a break lower. The pair is filling bids around 0.832. Cable turns below 1.32 again.
 
• Outside the UK, core bond markets licked their wounds after their relentless decline in recent weeks. US Treasuries outperform with changes ranging from -1.9 bps (30y) to -4.4 bps (5y), driven by real yields. Inflation expectations remain on the rise, supported by commodity prices soaring (again). Brent oil trades above $120/b, up more than 20% in just 5 days. Dutch gas futures bounce off €100/MWh support to €117. German/European yields ease 1-3 bps in a flattening move. EU budget commissioner Hahn poured cold water over expectations for more EU common debt issuance to help finance the green transition and organize a European defense. EUR/USD was already struggling amid slight risk-off (European stocks lose more than 1%) and eventually fell below 1.10 after Hahn’s comments. USD/JPY’s ascent stalls in the high 120 area while EUR/JPY shifted in reverse (from 133.23 to 132.7).
 
News Headlines

• Czech National Bank deputy governor Mora believes that circumstances will force the CNB to go well above 5% with rates. Those circumstances obviously are Russia’s invasion which lifts energy prices and thus inflation. Though the risk of stagflation is real, Mora believes that the Czech economy can stomach higher rates. The economic slowdown may not be that bad, mainly because the Czech labour market is very tight. People still have huge savings from during the pandemic and will keep on spending. Deputy governor Mora is more reluctant to use FX reserves and a stronger currency in helping to achieve inflation stability. CNB governor Rusnok floated that idea over the weekend. Governor Hulob yesterday said that he preferred rate hikes over FX sales. The CNB meets next on March 31. The policy rate currently stands at 4.5% with Czech money markets pricing a policy rate peak around 5.75%. EUR/CZK today touched 24.50 before rebounding back to 24.60.

• Russian president Putin told his government that he took the decision to switching to ruble payments for natural gas supplies of the so-called hostile states (US, UK and EU member states) and stop using the compromised currencies in such transactions. He ordered the central bank to develop a mechanism to make ruble payments within a week. Simultaneously, he stressed that Russia will definitely continue to supply natural gas in line with the volumes and prices, pricing mechanisms set forth in existing contracts. The Russian ruble rises on Putin’s creative accounting measure to try to circumvent some of the international sanctions. USD/RUB drops back below the 100 level.
 

Graphs & Table

EUR/CZK tested the 24.5 support area as deputy governor Mora expects Czech policy rates to peak “well above” 5%.

Russian ruble dives below USD/RUB 100. President Putin found a loophole in international sanctions.

USD/CAD: upward sloping trendline under pressure. Canadian dollar enjoys oil’s fierce comeback in recent days.

UK 2y yield erases most of a kneejerk move lower after Sunak presented spring budget statement. BoE expectations are unaltered.

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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