KBC Sunset Market Commentary 28/02/2022 via Trader Talent

• Russia is hurrying to defend its tanking currency in the wake of new sanctions announced by Europe and the US. By cutting the Bank of Russia’s access to its international reserves, they prevent the central bank from cushioning the blow on the currency and economy. The US Treasury Department later added more sanctions, banning transactions by US persons with the Russian central bank, the National Wealth Fund and the Ministry of Finance. In a response, the CBR jacked up policy rates from 9.5% to 20% at an emergency meeting this morning, forced Russian companies to sell 80% of their foreign currency revenue to the central bank and temporarily banned brokers from selling Russian securities held by foreigners. The Russian ruble continues to be under intense selling pressure, with moves exacerbated by liquidity issues since many dealers are no longer allowed to trade the currency. EUR/RUB gapped higher from 94.35 to 130.89 before paring some gains (ruble losses) to 122.1. Russian CDS’s surge with some suggesting a >50% probability to default. Russia’s central bank closed the stock market today but Russian stocks trading on exchanges elsewhere fall off a cliff.

• It is nothing but risk-off on all other financial markets as well. Stocks decline 2.5% though are off their lows of the day. Wall Street keeps it orderly, printing losses of about 1.5%. Core bonds are a popular safe haven bet. The US yield curve bull steepens with yields 5.2 (30y) to 11 bps (2y) lower. German yields decline 6 (10y) to 11 bps (2y). European swap yields drop 6.5 bps at the front end. For now though, this may be more of a kneejerk reaction rather than markets actually repricing central bank intentions. In case of the euro zone, above-consensus inflation in Spain (7.5% y/y vs 7% expected) today once again highlighted the matter at hand. It followed the 4.1% reading in France (3.7% expected) last week. If anything, current market developments only add fuel to the fire with oil, wheat and corn prices surging 3-4% again. Gas jumps 15%. On currency markets, the yen and dollar started off strongly but the rally fizzled in European dealings. EUR/USD tested support at 1.1121 before rebounding north of 1.12. EUR/JPY hit 128 but is currently changing hands in the 129.3 area. The Swiss franc is the only one holding on to almost all of the intraday gains. EUR/CHF trades near the 1.03 pivot. Things in Central-Europe are precarious. The Hungarian forint underperforms and is set for a record low close at 371.93 currently. PLN is attacking the 13-year low of November last year at around EUR/PLN 4.70. The Czech currency could erase all of the 2022 gains so far by closing within proximity of EUR/CZK 25.
 
News Headlines

• According to data from Turkstat published this morning, the Turkish economy last year expanded by 11%. Value added in the services sector grew 21.1%, information and communication activities +20.2%, professional administration and support + 17.3% and 16.6% in industry. Financial and insurance activities, agriculture and construction decreased by 9%, 2.2% and 0.9% respectively. On the demand side, final consumption expenditure of households increased by 15.1%, with the share of household consumption in GDP reaching 55.1%. In Q4, growth slowed to 1.5% Q/Q and 9.1% Y/Y. A separate report showed a sharp rise in the trade deficit from TRY 6.81 bln in December to TRY 10.26 bln in January (was only TRY 3.06 bln in January last year). The rising trade deficit (amongst others due to the higher cost of energy import) complicates the authorities’ efforts to restore a current account surplus which is seen as an important factor to restore financial stability. The lira recently traded stable despite global market tensions. EUR/TRY even declined today to trade at 15.54.

• Switzerland’s economic growth in Q4 slowed to 0.3% Q/Q down from 1.9% in the previous quarter as the economy was hampered by the latest corona wave. However, the industrial sector remained buoyant due to the chemical and the pharmaceutical sector. The economy grew 3.7% for the whole of 2021 after a -2.4% contraction in 2020 and returned to a pre-corona level by summer 2021.