Wednesday, 2 March 2022
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•          The war in Ukraine yesterday again triggered an outright risk-off session. The uncertainty on how far the conflict will go is evidently the first concern. However, from an economic point of view, markets fear a new wave of long-lasting supply chain issues, in sectors like energy and agricultural commodities. Western firms breaking the links with subsidiaries in Russia will also come at cost. The impact both on growth and on inflation are almost impossible to assess as of yet. Even so, markets are ‘gradually’ captured by some kind of stagflationary fear. A persistent rise in oil and (agricultural) commodities is an obvious visualization of rising costs of the conflict. Oil this morning, jumped north of $110 p/b!! European equities yesterday lost up to 4.0%! US indices lost 1.55% (S&P) to 1.76% (Dow). Bond markets clearly were occupied with safe have considerations and the negative impact on growth. US yields declined between 12.3 bps (5-y) and 5.6 bps (30-y). As was the case on Monday, the decline was solely due to a collapse in real yields (10-y -17 bps !!!). Inflation expectations rose modestly (7.5 bps). Moves in the European/German market were even more hefty. German yields declined 24.5 bps for the 5-y, 20.5/7 for the 10/2-y sector and ‘only’ 16.5 bps for the 30-y. The market clearly concluded that there is a big chance for the ECB to delay/or at least take a wait-and-see approach when communicating at next week’s policy meeting. The market currently sees only limited room for the ECB to frontload policy tightening. A positive deposit rate/policy rate end 2022 now looks quite far away even as inflationary pressures are rising sharply (again upward surprises in Italy 6.2% Y/Y and Germany 5.5% Y/Y). For now we don’t draw any firm conclusions. The US Manufacturing ISM remains solid (58.6 from 57.6), but evidently this was of little importance for trading.
On the FX markets, euro weakness and a further building of pressure on the CE currencies where the most striking features. EUR/USD yesterday evening already filled bids just below 1.11 (close 1.1125). The USD DXY index rallied to close at 97.58 nearing the cycle top of 97.74. Gains in the yen were modest (USD/JPY close at 114.92). A sharp rise in commodity prices evidently isn’t good news for the Japanese economy. The Swiss franc currently is one of the preferred safe havens with EUR/CHF testing the 1.02 area. The forint (close EUR/HUF 376.25) and the zloty (close EUR/PLN (4.75) both touched all-time/multi-year lows against the euro even as both centrale banks indicated they are ready to intervene in the FX market.

•          This morning, Asian equities mostly remain under pressure (Nikkei -1.6), Korea and Australia being small exceptions. The dollar outperforms (DXY 97.55) with USD/JPY regaining 115.(15). EUR/USD is again testing the 1.11 barrier. US yields continue yesterday’s decline especially at shorter maturities. Later today, global risk sentiment will remain the main driver for trading. Even so, the calendar is interesting too, with the EMU January preliminary CPI, the ADP labour market report, Fed Powell testifying before the House and the OPEC+ meeting. Fed Powell will reiterate that the Fed will do its job in containing inflation starting hiking rates this month. Question is whether this will slow the safe haven bid for US bonds at this stage. EMU inflation is at risk of beating expectations for a 0.8% M/M and 5.6%, but we doubt it will change the established trend. In this context, the euro probably is becoming ever more vulnerable. A sustained break blow 1.11 could trigger further stop-loss selling with 1.10 a next intermediate reference.

News Headlines

•          The World Bank is preparing a $3bn support package for Ukraine for the coming months. It includes a fast-disbursing budget support operation for at least $350 million, followed by $200 million in fast-disbursing budget support for health and education. The IMF meanwhile while consider Ukraine’s request for emergency money with little strings attached through the Rapid Financing Instrument as early next week. The Washington-based fund said it is also continuing to work on a review of Ukraine’s 2020 loan of which $2.2bn remains to pay out.


Long term (real) EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected. The German 10-y yield jumped to the 0.33 area. However, geopolitics and the fear for higher energy prices to cause a material slowdown, this week sent the 10-y back in negative territory. -0.11% now comes again into play as a first key support.

The Fed’s hawkish policy turn caused a surge in real yields. The January CPI release even triggered a first brief return above 2%. Fed talk since the escalation in the geopolitical narrative suggest policy normalization won’t be delayed. However, safe haven flows also brought the 1.70% previous support area back on the horizon.

The ECB in February dramatically changed its views on temporary inflation. Net bond buying was poised to end sooner (in Q3?), allowing for a first rate hike later this year (Q4). EUR/USD left the lows behind. However, the conflict in Ukraine made investors doubt on the pace of ECB policy normalization. Short-term momentum favors the dollar again. A break of 1.1121/06 would further weaken the picture.

The BoE hiked its policy rate to 0.5% in February with the biggest possible minority even voting for a 50 bps increase. Further tightening is in the pipeline. The pair tested 0.8282 support but rebounded quickly.

Calendar & Table

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.
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