Monday, 28 February 2022
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•          In the past, the impact of (geo)political tensions on global markets often tended the be relatively short-lived. End last week, it looked that global markets again were inclined to embrace a similar scenario. Investors apparently assumed that the Russian military action could soon be concluded and might lead to a ‘new political equilibrium’ in Ukraine (possible negotiations? Neutrality?). European (EuroStoxx +3.69%) and US equities (S&P +2.24%) rebounded. European/German bond investors also gave up most of their safe haven positioning and cautiously also returned their focus rising inflationary risks. The German curve rose 3.2 bps/3.9 bps in the 2 & 30-y sector and 5.9 bps/7.1bps elsewhere. Even intra-EMU spreads showed signs of an easing of tensions. US yields which already reversed most of their safe haven decline on Wednesday and Thursday closed with changes of less than 1 bp. Oil dropped (temporarily) below $100 p/b. The dollar (DXY) eased to close near 96.6. EUR/USD rebounded to close at 1.1268.

•          However, this weekend’s political and military developments clearly overthrew Friday’s positive investor mood. Russia and Ukraine are said to prepare negotiations near the Belarusian-Ukraine border, but it is unclear whether this will yield any result in the short-term. President Putin raising the alert on its nuclear deterrent only illustrated a further escalation in the conflict. At the same time, markets are pondering the potential consequences for the economy and financial system after western allies decided to decouple some Russian banks from the Swift payment system and took restrictive measures limiting the Russian central bank to use of its international reserves. At the open of Asian trading, the ruble was in free-fall. The Russian central bank raised the key rate from 9.5% to 20%. In volatile trade, the Russian currency trades near USD/RUB 105 after open substantially weaker. Brent oil ($103 p/b) again jumps as do several other commodities. The fall-out on Asian equity markets remains modest with Hong Kong losing about 1.0% but the likes of Japan (+0.2%) and Australia (0.73%) trading in positive territory. US Treasuries rally with yields at shorter maturities declining up to 9 bps. The TW dollar regains the 97.00 barrier. However, the yuan also enjoys some kind of safe have bid with USD/CNY declining to the 6.3125 area. EUR/USD dropped to the mid 1.11 area.

•          At the end of last week, it look that the key eco data to be published in the US (payrolls) and in Europe (inflation) this week could regain some market attention ahead of the upcoming March Fed and ECB meetings. However, short-term trading in US and even more on European markets will be dominated by a new risk-off wave. Even after last week’s rebound, the technical picture of the likes of the EuroStoxx50 remains fragile and futures suggest a new selling wave. German Bunds and Treasuries will remain well bid. More interestingly: will European swap rates continue a similar stickiness as they did recently? On FX, EUR/USD might go for a retest of the 1.1121/06 support. A break lower only would complicate the ECB’s reaction function as it would raise inflationary risks. Also keep a close eye at CE currencies with EUR/PLN (3.67) and EUR/HUF (370) nearing levels that are key in the CB’s anti-inflation strategy.

News Headlines

•          Australian retail sales recovered 1.8% m/m in January after slumping 4.4% in December, even amidst a renewed Covid outbreak with the omicron variant. Expectations were for a more modest 0.3% increase. Food retailing had the largest rise in sales last month, being up 2.2% in the largest monthly rise since July 2021. Sales in cafes, restaurants and takeaway food eased 0.8%. The strong data strengthens the RBA’s case that omicron wouldn’t derail the recovery. The central bank meets tomorrow. It is expected to keep the policy rate stable at 0.10%. The Australian dollar inches lower this morning in a risk-off move. AUD/USD trades around the 0.72 big figure.

•          President Joe Biden’s approval rating fell to a record low, a new Washington Post-ABC News poll showed. 37% said they approve of the job Biden is doing while 55% said they disapprove. Asked specifically about how Biden is handling the economy, 37% said they approve vs 58% disapproving. Half of the people in the survey disapproved the president’s handling of the pandemic. The results come one day ahead of Biden’s first State of the Union.


Long term (real) EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected. The break into positive territory has been confirmed. The German 10-y yield also cleared 0.15% resistance (61.8% 2018-2020 retracement), with 0.40% being the next reference. Geopolitics currently trump the monetary policy storyline, however declines in yields remained modest for now.

The Fed’s hawkish policy turn caused a surge in real yields. The US 10-yr yield took out the October top at 1.7%. The January CPI release triggered a first brief return above 2%. Fed talk since the escalation in the geopolitical narrative suggest policy normalization won’t be delayed.

The ECB changed its tone dramatically. Views on temporary inflation have changed. Net bond buying is poised to end sooner (in Q3?), allowing for a first rate hike later this year (Q4). EUR/USD left the lows behind. Short-term momentum favors the dollar again, especially in current uncertain circumstances. The pair tested the 2022 low but avoided a break.

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

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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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