Wednesday, 30 March 2022
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•          Ceasefire talks in Istanbul showed signs of progress. Ahead of the negotiations, Ukraine indicated openness to neutrality and adopt a non-nuclear status in return for security guarantees. Afterwards, and to “increase mutual trust”, Russia said it would significantly scale back military activity around Kyiv. Western officials stayed skeptical but equity markets didn’t. Stocks jumped up to 3% in Europe and almost 2% in the US. Oil prices intraday retreated 9% but capped losses to a little over 2% in the end (Brent at $110/b). EMU yields skyrocketed. Germany’s 2y rose more than 15 bps to trade positive for the first time since 2014 at some point as markets raised bets on ECB rate hikes. The rapid intraday decline in oil prices, however, offered counterweight via the inflation channel. Net changes amounted to 6.4-7.1 bps at the front-end of the German/EMU swap curve and 5.1-5.5 further out. In the US, where quite some Fed tightening is discounted by now, the oil price effect dominated completely. It resulted in a flattening move with yields up to 6.4 bps (10y) lower. The euro cheered on FX markets, with EUR/USD testing the first meaningful resistance level at 1.1121 but eventually closing below 1.1086 (+1 big figure). EUR/GBP took out the 0.84 with great conviction and went for a test of the YtD highs at 0.845. The yen was not prepared for the euro but staged a minor comeback vs the USD. USD/JPY finished lower from 123.86 to 122.88.

•          Japanese bonds sear at the (very) long end after the BoJ upped the ante (see below). The yen extends yesterday’s gains, this time also vs the euro. Technical considerations played a role as well. USD/JPY and EUR/JPY both entered overbought territory in recent days and momentum indicators showed signs of topping out. EUR/USD ekes out a gain to trade above 1.11. Core bonds rise.

•          The calendar starts to heat up today. We have ADP employment in the US and the EC’s economic confidence in the euro area. The first member state February inflation readings are due in Germany and Spain ahead of the EMU reading on Friday. An early reading in Germany’s state of North Rine-Westphalia (7.6% y/y, from 5.3%) clearly suggest upward risks. Markets will ponder the latest hopeful developments on the geopolitical front as well and what it may mean for central bank policy. If parties (Russia) are serious – and that’s a big if – it supports the case for (more, faster) tightening especially in Europe, even if commodity prices would ease. Keep a close eye at EUR/USD too. It is testing the upper bound of a closing triangle pattern. Will inflation readings today force a break higher?

News Headlines

•          Japanese retail sales declined of the third consecutive month by a bigger than expected -0.8% M/M, bringing sales also 0.8% below the level of the same month last year. Sales growth February was still hampered by restrictions to address the spread of the latest wave of the coronavirus. The data suggest the risk of very mediocre or even negative growth in Q1, complicating the government’s efforts to organize a demand driven recovery. In this context, the BoJ this morning stepped up its efforts to prevent an unwarranted rise of yields/tightening of economic conditions. The bank today raised the amounts of bonds it planned to buy at regular operations in the 3y-10y segment. At the same time, it also offered to buy ultra-long JGB’s in an unscheduled operation. Earlier this week the bank already announced unlimited buying of 10-y bonds to protect the 0.25% cap for the 10-y yield. Contrary to yesterday, yields today declined across the curve. The 10-y yield currently trades near 0.21%. The 30-y yield dropped to 0.98%, compared to a peak level of 1.10% yesterday.

•          According to the Australian trade Minister Tehan, Australia and India are getting very close to finalize a free trade agreement. An announcement might be released in coming days. According to the Australian government mutual trade between the two countries was about a$ 24 bln in 2020. Access of Australia to the Indian agriculture market is said to be one of the remain points of discussion. The attempt to reach a trade agreement between India and Australia come as trade relations between Australia and China are under pressure.


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 heavy 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. Risks for a short-term correction rise as the commodity surge has eased. 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. A bullish triangle is forming with risks for an outbreak building.

EUR/GBP took out the first resistances between 0.82 and 0.83. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. EUR/GBP is showing signs of bottoming out nevertheless amid (a hoped-for) easing of geopolitical tensions.

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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