Monday, 28 March 2022
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•          The Interfax report on Friday suggesting Russia may be refocusing on the “complete liberation of Donbas” caused yet another sharp core bond selloff. Markets believe such de-scaling of the conflict to the eastern regions of Ukraine is the first step in ending it. This would ultimately result in less economic uncertainty and allow central banks to push through with policy normalization. It explains the hefty bear flattening in both the US and Europe. US yields jumped 4.6 bps (30y) over 13.2 bps (2y) to 14.7 bps (5y). German/European yields added between 2.5-8.5 bps. US stocks fell initially but staged a comeback throughout the session. The S&P 500 and DJI managed a close of about 0.5% in the green. Oil prices rose with Brent crude sticking near $120/b after Europe announced a deal with the US that allows the continent to cut reliance on Russian fossil energy (a little). The US dollar wasn’t in great shape but held the upper hand against the euro still. EUR/USD headed into the weekend below 1.10. EUR/GBP closed marginally lower at 0.833. The Japanese yen recouped a tad of the whopping losses in recent weeks in a move that didn’t convince anyone. USD/JPY and EUR/JPY still closed above 122 and 134 respectively and surge further this morning. USD/JPY (123.12) is closing in on the 2015 high (125.86). The Bank of Japan announced unlimited bond buying this morning (see below), in an increasingly contrasting move with other central banks to keep policy as easy as possible. Japanese yields continue to rise nevertheless, as do core (US) bonds. The short end adds another 10bps+ with more segments of the US yield curve inverting (30s5s for the first time since 2006). US money markets expect well more than 200 bps of additional tightening by year-end in the meantime. The peak policy rate is slowly being pulled forward in time (now 2H2023). Overall risk sentiment is fragile, more so than on Friday, allowing the greenback this time to bank on yield support. EUR/USD eases further south to 1.095. The trade-weighted dollar rises to YtD highs at 99.21.

•          The economic calendar this week is particularly backloaded with, amongst others, payrolls and ISM business confidence for the US and European inflation figures both due on Friday. Speeches by Bank of England governor Bailey and UK’s finance minister Sunak (in the wake of the spring budget) are worth mentioning for today. Our main attention goes to the development of Asian market trends going into European dealings though. The European 10y swap yield is attacking the 2018 high of 1.192%. In case of a break, the 2015 (intraday) high is not that very far off (1.37%). The US 10y yield takes out 2.50% and is already looking at resistance of 2.56% (76.4% recovery of the 2018-2020 decline). The combo of a vulnerable equity sentiment with monetary policy frontrunning in theory gives the advantage to the USD.

News Headlines

•          The Bank of Japan this morning offered to the buy an unlimited amount of 10-y government bonds to cap the yield of the bonds at 0.25%. The bank took a similar fixed rate buying operation on February 14. The BoJ under its yield curve control wants to keep the 10-y near 0.0% with a deviation allowed up to 25 bps. For now the action had hardly any downward impact on yields. The offer comes after BoJ’s Kuroda pledged that, contrary to several other major central banks, the BoJ wants to keep an easy monetary policy even as inflationary risks are building. The BoJ is allowing more flexibility in yields of bonds with a longer maturity than 10-y. The 30-y yield this morning is testing the 1.0% barrier, the highest level in more than six years.

•          In a speech Bank of Canada (BoC) deputy governor Sharon Kozicki indicated that the bank is prepared to act forcefully to bring inflation back to target. “Inflation in Canada is too high, labor markets are tight and there is considerable momentum in demand”, Kozicki was quoted. In this context, she expects ‘the pace and magnitude of interest rate increases and the start of QT to be active parts of our deliberations at our next decision in April’. The hawkish comments are also raising expectations that the BoC could move to steps of 50 bps rate hikes at one of the coming meetings. The 10-y Canadian government bond yield on Friday jumped 15 bps to reach 2.55%. The 2-y yield jumped 20 bps to 2.35%.


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 will probably remain elevated. Next resistance at 0.58% is currently under attack.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. 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.

EUR/GBP took out the first resistances between 0.82 and 0.83. However, a rebound above 0.8478 YTD top was a step too far. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn.

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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