Monday, 21 March 2022
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•          With still only mixed signals on any progress in the negotiations between Ukraine and Russia, European investors on Friday initially took some chips off the table after last week’s rally. US investors were less worried on the impact on their economy. US indices gained 0.80% (Dow) to 2.05% (Nasdaq). European equities also reversed losses (EuroStoxx +0.44%). In the wake of last week’s policy meeting, Fed hawks Waller and Bullard were the first speakers to defend/reinforce their view. Waller openly voiced support for a 50 bps hike at one of the coming meetings. Bullard already dissented for such a step last week and sees a good reason for a 3%+ policy rate end this year. These comments don’t express the Fed consensus but are signs the FOMC is prioritizing inflation. The US yield curve flattened with the 2-year rising 2.25 bps while the very long end declined 4.9 bps (30-y). Changes in European yields were limited with German yields finishing unchanged (2-y/30-y) to 1.2/1.3 bps lower for the 5/10 y sector. The dollar rebounded after a rather dismal post-Fed performance. Gains were modest still given growing interest rate support at the short end of the curve. DXY closed at 98.23, off the intraday top near 98.62. The euro lost traction with EUR/USD finishing at 1.1051 (from 1.1091). Sterling regained most of Thursday’s post-BoE losses (cable close 1.3878; EUR/GBP declined to 0.8386 from 0.8435) even as UK yields decline further (2-y -8.9 bps).

•          This morning, Chinese markets are turning to a wait-and-see approach as they look for more concrete action from authorities to support growth as signaled last week. Chinese banks kept their 1 and 5 year prime loans rates unchanged. A rebound in crude oil (Brent $ 111.25) illustrates that geopolitical tensions keep their grip on markets with ongoing mixed headlines on any progress to solve to crisis in Ukraine and tensions in the Middle East (Houti attacks on Saudi installations). This might set the stage for a mild risk-off start in Europe this morning.

•          The US eco calendar is thin this week. The EMU PMI’s will be published on Thursday. Aside from geopolitical headlines, the market will be flooded with comments from Fed and ECB policy makers. Today’s speakers already include ECB’s Lagarde, Makhlouf and Nagel. On the Fed side Bostic and Powell will speak at the NABE conference. Even as, especially Fed, speakers will reiterate their priority on reining in inflation, especially yields at longer term maturities might be heading for some short-term consolidation/pause with resistance at 2.24% for the US 10-y yield. The German 10-y yield also shows signs of a pause near the 0.40/0.41% area. Recently, a cautious risk sentiment combined with higher oil/commodity prices favoured the dollar over the likes of the yen, but also over the euro. EUR/USD 1.1121/37 looks like a rather solid resistance short-term. The UK calendar this week contains CPI data, PMI’s and retail sales. Markets will also look out whether UK Fin Min Sunak will use any budgetary room to alleviate the sharp decline in citizens disposable income (budget statement Wednesday). A post BoE setback of sterling last week was short-lived even as short-term rates declined. EUR/GBP 0.8458/78 remains a high profile resistance for further EUR/GBP gains. In Belgium, the debt agency today sells 2032, 2040 and 2029 bonds in a regular auction.

News Headlines

•          The Australian government announced an alumina export ban to Russia. The country relies on Australia for nearly 20% of its alumina needs. The move will limit Russia capacity to produce aluminum, which is a critical export for Russia. In a statement, the government added that it will work closely with exporters and peak bodies that will be affected by the ban to find new and expand existing markets. Aluminum prices spike around 5% higher this morning.

•          Rating agency S&P raised the outlook on the Spanish A rating from negative to stable. The medium term outlook for Spanish growth is favourable, with tourism positioned for a strong 2022-2023 recovery and €150bn (11.5% of GDP) in Next Generation and EU budgetary grants to be disbursed from 2022-2027. Fiscal performance is improving, but continues to lag peers. External surpluses and benefits from E(M)U membership are other long term positives. S&P uses the best credit rating for Spain amongst majors, with Fitch (A-) and Moody’s (Baa1) rating the country respectively one and 2 notches lower.


European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter. Real yields may further bottom out while inflation expectations may ease but will probably remain elevated. Next resistance stands at 0.58%.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Medium term, the sell-off on core bond markets isn’t over.

EUR/USD tested the 1.08 pandemic support zone but survived. A subsequent short squeeze propelled the pair then back to 1.10. The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. It protects EUR/USD’s downside even as the Fed conducted its policy rate lift-off. US (real) policy rates remain deeply negative.

Sterling proves no longer resilient to the uncertain risk environment. Combined with new-found euro vigor, EUR/GBP took out the first resistances between 0.82 and 0.83. A return above 0.845/72 would bring the pair back in the sideways trading range that dominated 2021. Regarding monetary policy, the balance after the March ECB and BoE meetings turned more even.

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.
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