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 as scheduled in March, added language describing spillover effects from Middle Eastern conflicts, raised inflation forecasts for the next three years, and lowered growth forecasts for this year and next. The derivatives market has priced 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 Iran gas fields, and attacks on Qatar 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

The ECB kept its three key interest rates unchanged as scheduled in March, 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. The derivatives market has priced in expectations of two to three rate hikes this year, but we believe this outlook is overly aggressive. After news of Powell’s hawkish comments, the explosion at Iran gas fields, and attacks on Qatar LNG facilities, the market once again traded inflation risks. We believe it is not appropriate to “one-way bet” on assets already experiencing high volatility.

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

1. Maintained the three key interest rates 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 (previously 1.9%, 1.8%, and 2.0%), and core inflation to be 2.3%, 2.2%, and 2.1% (previously 2.2%, 1.9%, and 2.0%). Economic growth is forecasted at 0.9%, 1.3%, and 1.4% (previously 1.2%, 1.4%, and 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 East conflict on global commodities, 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 prices peaking at $119/bbl and €87/MWh; and a severe scenario where flows drop 60%, with prices peaking at $145/bbl and €106/MWh, and then slowly declining. Under these adverse and severe scenarios, the ECB projects euro area HICP inflation to reach 4.2% and 5.8% in Q4 2026, respectively. Current market conditions as of March 19 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 lead to more persistent inflation due to rising inflation expectations, wage increases, broader non-energy inflation, and widespread disruptions to global supply chains.

▍ Derivatives markets have priced in expectations of two to three rate hikes this year, but we believe this is overly aggressive.

Recent sharp increases in oil prices will indeed boost euro area inflation, but given the constraints faced by the Biden administration regarding mid-term election affordability issues, the organizational risks to Iran’s Revolutionary Guard, and the limited weapon and defense stockpiles 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 median is unlikely to stay elevated for long, differing significantly 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 like 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 the derivatives market consensus.

▍ 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 unexpected US February PPI data, hawkish comments from Powell, explosions at Iran gas fields, and attacks on Qatar LNG facilities, the market has reverted to a focus on energy supply shortages, reigniting concerns about global inflation and tightening liquidity expectations, leading to oil prices rising and gold prices falling sharply. We believe that, given the current uncertainty around Iran, expectations of conflict intensity may fluctuate between heating up and cooling down, with “possible TACO” (tighter and more uncertain) versus “TACO not useful” scenarios. Under this outlook, we think oil prices are unlikely to sustain a one-sided upward trend, and gold prices are unlikely to continue falling sharply. Gold at around $4,600 per ounce is close to the level before the rapid surge in early January, and after a sharp decline, gold may again show some value as an asset. The US dollar remains a relatively consensus currency during conflicts, likely to stay somewhat strong, while eurozone bonds and equities appear somewhat “dull” before liquidity easing expectations re-emerge.

Risk Factors:

• Evolution of Iran situation or other unexpected events exceeding expectations
• Overseas economic and inflation performance surpassing or falling short of expectations
• Global market liquidity or sentiment changes exceeding expectations

(Source: Beijing News)