Daily Market Outlook, March 2, 2022

Overnight Headlines

When the yield on Germany's benchmark Bund, considered one of thea safest assets in the world, posts its biggest one-day fall since 2011 (as it did on Tuesday), something has changed. The slide in borrowing costs in Germany, with 10-year yields back in negative territory where they remain this morning, echoes similar moves in other major bond markets and is symptomatic of a big shift in investor thinking.

‘Risk off’ sentiment dominated markets yesterday and has continued to do so overnight. European and US markets fell sharply yesterday, and Asian markets are mostly down this morning. Oil and gas prices have surged with Brent crude touching above $111bbl. Government bond yields plummeted across several markets as traders scaled back their expectations for interest rate rises. Meanwhile, the US dollar is up sharply against the euro and sterling. In his annual State of the Union address, US President Biden said that Russian leader Putin “will pay a high price” for his actions towards Ukraine. However, much of his speech was about his plans to combat higher inflation as he attempted to lift his plummeting polling ratings.

The Eurozone February CPI is forecast to show a further rise. Indeed, following stronger-than-expected reports for some member countries, analysts have raised forecasts and now expect annual headline inflation to be 5.8% (from 5.1% in January), a new high the single currency era. The European Central Bank, the ECB, continues to take some comfort from the fact that ‘core’ inflation is much closer to target. However, today’s reading is also likely to show a modest rise in that measure to 2.6% from 2.3%. With inflation everywhere else set to move even higher in the wake of the Ukrainian crisis, central banks have to weigh up whether they are more concerned about that or potential downside risks to economic growth. Comments so far since the crisis escalated have suggested that the European Central Bank may now be more cautious in changing their policy stance. However, the US Federal Reserve and the Bank of England seem to be indicating that they are still on course to make some near-term policy tightening moves.

Fed Chair Powell will testify to Congressional committees today and tomorrow. This will be his last opportunity to signal the Fed’s intentions before the blackout period ahead of the March policy meeting. It seems likely that he will use the opportunity to confirm that a US rate hike is still on the cards for March and that further tightening moves are likely this year. However, he may also repeat previous comments that, in the present uncertain environment, the Fed needs to be ‘nimble’ and if necessary, change direction quickly. A couple of BoE policymakers are also scheduled to speak today including external Monetary Policy Committee member Tenreyro who typically seems to be the most dovish member of the rate-setting Committee. Meanwhile, the Bank of Canada will give its latest policy update. It is expected to hike rates by 0.25% despite recent events.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

USDJPY - 116.60 470m. 114.90/115.00 951m. 114.20/30 669m.
EURUSD - 1.1370/80 699m. 1.1350/60 1.43bn (939m P). 1.1300/20 2.19bn (1.43bn P). 1.1100 435m. 1.1050/60 668m.
GBPUSD - 1.3400 818m. 1.3270 603m.
AUDUSD - 0.7370 692m. 0.7350 615m. 0.7130 590m.
USDCAD - 1.2840 450m. 1.2770/80 538m. 1.2590 538m. 1.2560/70 777m.
EURJPY - 129.20/30 799m. 127.70 702m.