Thursday, 10 March 2022
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•          Full-blown risk-on. Equities rallied like there was no tomorrow with gains in Europe reaching almost 8% (German Dax) and up to 3.6% on Wall Street (Nasdaq). The EuroStoxx50 (+7.44%) convincingly smashed resistance at 3608 and a minor reference located at 3742.5. It still trades below the pre-pandemic high though. Commodities including the likes of oil (Brent $111/b) and gas declined 13% and 27% respectively, easing concerns of its impact on the economy even though some damage has already been done. Gold was pummeled back below $2000/ounce. Safe haven flows to core bonds reversed with German Bunds slightly underperforming USTs. The curve in Germany bear flattened with yields surging 12.3 bps at the front end (2y) and 10.4-10.7 bps in the 10y-30y sector. European swap yields added 3.6 (2y) to +-7 bps for longer tenors. The 10y yield even closed at a new recovery high (0.90%). US yields rose 8.2-10.8 bps across the curve with a late-session sprint after a $34bn 10y auction tailed slightly. There was no stopping the euro yesterday. It excelled vs. almost all major peers. EUR/USD rebounded almost two big figures from 1.089 to close at 1.1076, thereby taking out first resistance of 1.104. EUR/JPY and EUR/CHF surged to well above 128 and 1.02 respectively. EUR/GBP closed near the 0.84 area – the highest level in a month. Central-European currencies extended a sharp comeback after hitting 9-month (CZK) or even record lows (HUF and PLN). The trigger for such huge market moves was probably a combination of elements. Investors apparently concluded that the barrage of western sanctions and Russian countermeasures may at least take a break after some of the most harshest were already taken by now. Ukraine also kept the door open to discuss country neutrality, a key demand by Russia to stop the war. Specifically for Europe, preliminary plans for another joint bond issuance to finance the energy transition and defense spending boosted risky assets in the region. Whatever the reason, it is also supporting Asian-Pacific markets this morning. Stocks jump with Japan outperforming (+4%). Core bonds lick their wounds. The euro retains most of its stunning gains yesterday as it awaits the ECB policy meeting later today.

•          The March ECB meeting should have been an official turning point in monetary policy. However, the war in Ukraine spewed an enormous layer of uncertainty over the economy. But it also spurred commodity prices significantly, putting already-elevated inflation under additional upward pressure which will have to be addressed one way or another. As a compromise, policy normalization plans as hinted by president Lagarde in February will probably be merely postponed until the ECB has a bit more clarity on the situation. This could be just one month (next meeting April 14). In any case, our scenario of ending QE in Q3 followed by a rate hike in Q4 still stands. In light of recent market talk, we thus see a chance for a hawkish surprise. The market reaction, however, will be clouded by the release of US CPI (7.9% consensus) around the same time. We believe the upward surprise here has to be sizeable for markets to reconsider a 50 bps hike by the Fed next week.

News Headlines

•          In South Korea, the candidate of the conservative opposition Yoon Suk-yeol won the election to become president of the country. He secured the victory over the candidate of the ruling centre left democratic party by a historic low margin of 1.0%. The new president will have try to unify the country after a bitter political fight. However, he faces challenges to implement a new policy as the party of former president Moon retains a majority in Parliament. Important domestic policy issues include energy policy, housing and real estate prices and taxes. The new president is seen as favouring a more market oriented, less regulatory approach. With respect to international policy, he is expected to take a tougher stance in its policy to China and North Korea.

•          The February wholesale prices suggest that inflation is also gradually reaching Japan, even before the sharp rise in commodity prices. Japan PPI wholesale prices jumped 0.8% M/M to be up 9.3% Y/Y, according to data from the Bank of Japan, the fastest pace since 1980! Higher import prices (25.7% Y/Y) are filtering into domestic economic activity. With wage rises still modest, inflation is at risk to further weigh on already mediocre consumer spending.


Geopolitics and the fear for higher energy prices to cause a material economic slowdown hijacked the ECB normalisation narrative. Real yields tumbled to new historic lows but may have bottomed. Soaring inflation expectations provide additional nominal yield support, causing a brisk return above the 0.14%-0.16% area. The recovery high is already back in focus.

Fed talk since the geopolitical escalation suggests policy normalization to fight consistently high inflation won’t be delayed. Real yields declined but avoided new record lows. Spiraling energy prices put inflation expectations on an upward path in the US too (>3%). The previous cycle highs in nominal yields are thus not too far away.

The euro is in dire straits, suffering more than most other currencies from the conflict at the eastern European borders. Markets pared ECB normalization bets. The monetary policy spread as well as dollar safe haven flows caused EUR/USD to stumble to the lowest levels since March 2020. The 1.08 pandemic support zone was tested but survived.

Testament to euro weakness is EUR/GBP in times of risk-off. The pair tested and temporarily (?) broke below 0.8282 support to hit the lowest levels since 2016. Regarding monetary policy, the BoE hiked its policy rate to 0.5% in February with further tightening in the pipeline.

Calendar & Table

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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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