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Friday, February 25, 2022

Daily Market Overview

Click here to read the PDF-version of this report.

Markets:

• Yesterday’s US  price action already suggested that markets were preparing for some kind of ‘post-Ukraine normalcy’. US equities more than reversed initial losses. Yields returned to well-known territory. Fed officials held the line that, at this stage, geopolitical developments don’t change the Fed policy roadmap. This morning’s first reaction on European markets understandably was more guarded as headlines indicated that a battle for the Ukraine capital Kyiv could start any time. The impact of the conflict for neighboring Europe also will be deeper and more persisting (cf infra comments Lane). However, as trading developed sentiment in Europe also improved markedly. Comments that Russian president Putin might be prepared to hold talks with Kyiv on a neutral status of the country maybe supported sentiment further. European equities are building out gains of up to 3%. Even so, the EuroStoxx 50 remains below 4000 reference. EMU interest rates finally also joined the (geopolitical) normalization trade. Eco data were no major focus for trading. Still, higher than expected French and Belgian CPI’s were a reminder that the debate on inflation will only intensify. German yields are rising 2.0 bps (2-y) to 5.5 bps (5-y). The German 10-y yield regained the 0.20% mark. The EMU 10-y swap (0.85%) even nears the cycle top of 0.90%. Despite the rise in core yields, the risk-on caused a corrective narrowing in EMU peripheral spreads (10-y), Greece (-8 bps) and Italy (-4 bps) outperforming. US spending and income data were close to expectations. The PCE deflators, closely watched at the Fed, rose as expected (general 0.6% M/M and 6.1%Y/Y; core 5.2% Y/Y from 4.9%) but didn’t accelerate the market dynamics. This also applies for solid January durable goods orders (1.6% M/M). Still, US yields are also rebounding further, rising between 1.0 bp (30-y) and 2 bps (5-y). The US 10-y yield tries to regain the 2% handle. Oil eases back below $97/b and wheat also eases about 7% off this morning’s multi-year peak levels. However, much more is needed to ease the inflationary threat from this week’s broad-based jump in commodity prices.

•  As was often the case of late, the repositioning on the FX market again was far less dynamic that in other markets. The TW dollar (DXY) is losing a few ticks (96.85). The presumed safe havens also are only losing modest ground. USD/JPY is going in the 115.50 area. EUR/CHF tries to regain the 1.04 level. The EUR/USD performance (1.1225) remains unconvincing. It doesn’t look easy to regain the previous neckline support at 1.1286. Sterling suffers from a further decline in (ST) yields. EUR/GBP trades near 0.8390 (from 0.837). In the CE region, the Czech koruna (EUR/CZK 24.7) regained a big part of this week’s Ukraine driven losses The zloty (EUR/PLN 4.627) and the forint (EUR/HUF 365.7) have some more work to do.
 
News Headlines:

• Belgian inflation accelerated again in February, rising by 0.63% M/M to 8.04% Y/Y (from 7.59% Y/Y in January). It’s the highest inflation level since March 1983. Energy prices rise by 60.99% Y/Y and contribute 5.03 percentage points to the total inflation. Nevertheless, core inflation accelerated as well in February, from 2.98% Y/Y to 3.28% Y/Y. Food inflation increased from 2.26% Y/Y to 3.84% Y/Y with inflation for rents accelerating from 2.15% Y/Y to 2.49% Y/Y. Services inflation slowed from 3.35% Y/Y to 3.2% Y/Y. Inflation based on the national health index rose from 7.12% Y/Y to 7.56% Y/Y in February. French inflation rose by 0.8% M/% to 4.1% Y/Y (from 3.3% and vs 3.7% forecast). Both inflation prints already suggest upward risks to next week’s EMU print. Consensus currently expects a rise from 2.3% Y/Y to 2.5% Y/Y for core inflation and from 5.1% Y/Y to 5.3% Y/Y for the headline reading.

• Sources close to the matter told Reuters that ECB chief economist Lane told fellow policymakers that the Ukraine conflict may reduce EMU growth by 0.3%-0.4% this year in the base scenario (currently 4.2% expected). In a downside risk scenario, the hit could be as large as 1, in a relatively mild one there would hardly be any impact. Lane didn’t update inflation prognosis yet, but warned for a significant upgrade to the December projections. Inflation could possibly be above the ECB’s 2% inflation target over the complete policy horizon. The current inflation trajectory is 3.2%, 1.8%, 1.8% for 2022-2024.

 

Graphs & Table

EuroStoxx 50 rebounds 3.0% but technical picture remains fragile

German 10-y yield regains 0.20% barrier as safe haven bid for Bunds eases.

EUR/HUF: test of key 370 area rejected, but forint still has a long way to go to reverse Ukraine-driven loss.

Wheat eases off multi-year top, but still contributes to broad inflationary pressures

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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