Citic Securities: Should Not Make "One-Way Bets" on Assets That Have Already Experienced High Volatility

On March 21, according to a research report from CITIC Securities, the European Central Bank (ECB) maintained its three key interest rates unchanged as scheduled. The report added language about spillover effects from Middle Eastern conflicts, raised inflation forecasts for the next three years, and lowered growth forecasts for this year and next. Derivatives markets are pricing in expectations of two to three rate hikes by the ECB this year, but we believe this outlook is overly aggressive. After news of Powell’s hawkish comments, the explosion at an Iranian gas field, and attacks on Qatari LNG facilities, the market once again traded inflation risks. It is not advisable to “one-way bet” on assets already experiencing high volatility.

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Overseas Macro | Market Volatility, ECB Holds Steady

On March 21, the ECB kept its three main interest rates unchanged as scheduled, added language about spillover effects from Middle Eastern conflicts, raised inflation forecasts for the next three years, and lowered growth forecasts for this year and next. Derivatives markets are pricing in two to three rate hikes this year, but we believe this expectation is too aggressive. After news of Powell’s hawkish stance, the explosion at an Iranian gas field, and attacks on Qatari LNG facilities, inflation risks are once again being traded. We believe it is unwise to “one-way bet” on assets already showing high volatility.

▍ The March ECB meeting was hawkish, with four main points:

1. Maintained the three key interest rates unchanged as scheduled. The deposit facility rate, main refinancing rate, and marginal lending rate remain at 2.00%, 2.15%, and 2.40%, respectively, in line with market expectations. The ECB reiterated its data-dependent approach and did not pre-commit to a specific rate path.

2. Added language about spillover effects from Middle Eastern conflicts. The ECB stated that the conflict poses upside risks to inflation and downside risks to growth in the euro area. The conflict has a substantial short-term impact on inflation through rising energy prices, while the medium-term impact depends on the scale of indirect and secondary effects. The ECB reaffirmed that the Governing Council is closely monitoring the situation and is prepared to respond to uncertainties.

3. Raised inflation forecasts for the next three years, lowered growth forecasts for this year and next. The ECB now expects euro area inflation to be 2.6%, 2.0%, and 2.1% in 2026, 2027, and 2028 (previous forecasts were 1.9%, 1.8%, and 2.0%). Core inflation is forecasted at 2.3%, 2.2%, and 2.1% (previously 2.2%, 1.9%, 2.0%). Economic growth is projected at 0.9%, 1.3%, and 1.4% (previously 1.2%, 1.4%, 1.4%). The updated forecasts are based on information as of March 11. The upward revision in inflation is mainly due to rising energy prices, while the downward revision in growth reflects disruptions from the Middle Eastern conflict on global commodity markets, real incomes, and confidence.

4. Published hypothetical alternative scenario forecasts. The baseline scenario assumes oil and gas prices peak around $90/bbl and €50/MWh in Q2 2026 and then decline rapidly. Two other hypothetical scenarios were also provided: an adverse scenario where flows through the Strait of Hormuz drop 40% in Q2 2026 and then recover by Q4 2026, with oil and gas prices peaking at $119/bbl and €87/MWh before gradually declining; and a severe scenario where flows drop 60% starting Q1 2027, with prices peaking at $145/bbl and €106/MWh before slowly declining. Under these scenarios, the ECB projects euro area HICP inflation at 4.2% and 5.8% in Q4 2026, respectively. As of March 19, current market conditions are between the baseline and adverse scenarios.

▍ Lagarde’s speech also focused on the potential impact of Middle Eastern conflicts.

Lagarde pointed out that risks to euro area growth are skewed to the downside, while inflation risks are skewed to the upside, especially in the short term. The ongoing Middle Eastern conflict increases global policy uncertainty, with continued conflict likely to raise energy prices and dampen confidence, thereby eroding incomes and reducing private sector spending. She also noted that higher energy prices could prolong inflationary pressures due to rising inflation expectations, wage increases, broader non-energy inflation, and widespread disruptions to global supply chains.

▍ Derivatives markets are pricing in two to three rate hikes this year, but we believe this is too aggressive.

Recent sharp increases in oil prices do indeed push up euro area inflation, but we think that given the U.S. midterm election concerns, the organizational risks faced by Iran’s Revolutionary Guard, and the constraints on weapons and defense inventories across Middle Eastern parties, the current high intensity of the Iran conflict is unlikely to be sustained long-term. Market sensitivity to geopolitical risk premiums may also diminish over time. Although the peak oil price remains uncertain, the central tendency should not stay elevated for long, which is quite different from the 2022 European energy crisis scenario. If our expectations are correct, this suggests that recent oil price impacts on euro area inflation are more of a one-time shock rather than a driver of inflation expectations or second-round effects. Under this outlook, the ECB still has room to hold steady this year, rather than raising rates two to three times as implied by derivatives markets.

▍ The market is once again trading inflation risks, but we believe it is unwise to “one-way bet” on assets already experiencing high volatility.

Following the unexpected rise in U.S. February PPI, hawkish comments from Powell, explosions at Iranian gas fields, and attacks on Qatari LNG facilities, the market has reverted to a focus on energy supply shortages, reigniting concerns about global inflation and tightening liquidity expectations. Oil prices surged, and gold prices plummeted. We believe that until the Iran situation clarifies, expectations around conflict intensity may fluctuate between escalation and de-escalation, “TACO” (temporary and cautious optimism) and “TACO not useful” phases. Under this scenario, we think oil prices are unlikely to sustain a one-sided rise, and gold prices are unlikely to fall continuously. Gold at around $4,600 per ounce is close to the level before its sharp rise in early January, and after a plunge, gold may again show some allocation value. The US dollar remains a relatively consensus currency during conflicts, likely to stay somewhat strong, while eurozone bonds and equities may feel somewhat “dull” until liquidity easing expectations re-emerge.

Risk Factors:

• Evolution of the Iran situation or other unexpected events exceeding expectations
• Overseas economic and inflation performance surpassing or falling short of expectations
• Changes in global market liquidity or sentiment exceeding expectations

(Source: Beijing News)