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Sunset Market Commentary

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Markets kicked off today with a dose of optimism despite the US having blacklisted some Chinese companies, a move which is considered to increase its negotiation leverage. Sentiment took a turn for the worse during early European dealings however. China suggested it is mulling retaliatory actions although it hasn’t announced any yet. The White House is moving forward with discussions around restrictions on portfolio flows into China, people familiar later said (see below).  Increased US/Sino tensions don’t bode well for upcoming trade negotiations (this Thursday). Regarding today’s data, markets did nothing more than to take note from better than expected industrial production figures (0.3% m/m, the first increase in 5 months). Declining producer price inflation in the US (-0.3% m/m both headline and core vs. a slight increase anticipated) also went largely unnoticed. European stocks wiped out opening gains and trade up to 1% lower. US stocks open in negative territory. The US yield curve bull flattened with yield changes varying from -3.6 bps (2-yr) to -4.2 bps (10-yr). Markets will closely watch Powell’s speech later tonight for any guidance (confirmation) of monetary policy going forward. Changes in German yields are much more limited with the belly of the curve outperforming (about -1.5 bps). Peripheral spreads are virtually unchanged with only Greece underperforming (+5 bps). The country’s 10y auction lured books in excess of 5.4bn euro. The final yield amounted to 1.5%, which was lower than the initial price guidance (1.55%) but higher than market rates (1.45% at the moment). The country aimed at raising a minimum of 1bn euro but eventually tapped 1.5bn. Italy has opened books on a dollar bond sale, its first offering in the currency since 2010. It is selling bonds maturing in 5, 10 and 30 years. EUR/USD initially held up pretty well given the fragile risk environment (Brexit, trade). The currency pair eked out gains throughout the day to reach an intraday peak just shy of 1.10 before reversing its uptrend as the first US dealers joined. EUR/USD is currently trading at around 1.097, close to unchanged vs. opening levels. Moves in USD/JPY rhyme more with current market circumstances. The couple fell again below 107.

Sterling faced a new round of selling pressure today. News came out that UK PM Boris Johnson had a call with Germany’s Merkel this morning. The German chancellor supposedly told the premier that Northern Ireland must remain part of the EU’s customs union if he wants to get a deal done. Under Johnson’s proposal such an arrangement would only exist if the Northern Irish would give their consent every four years, which was said to be unacceptable for Merkel. Johnson replied that if that was the block’s stance, a Brexit deal is “essentially impossible”. His comments triggered criticism from both sides of the North Sea. Outgoing EU Council president Tusk urged Johnson to stop playing “some stupid blame game”. Brexit’s latest again highlights the huge rift that exists. The clock is ticking however and sterling investors got anxious. EUR/GBP surged some 0.7% towards – but keeping intact (for now) –  the 0.90 resistance area (38.2% fibo retracement). Cable tumbled from 1.32 to 1.22 at the time of writing.

News Headlines

Germany warned of a repeat of the 2015 migration crisis as Greece and Cyprus are sounding the alarm over a strong surge of arrivals from Turkey. Greece printed the highest monthly arrival numbers in August since the EU-Turkey deal in 2016 which curbed migration drastically and put an end to the crisis.

The US administration is focusing on limiting Chinese stocks in investments made by US government pension funds, according to people familiar with the discussions. The US Treasury denied considering any restrictions on portfolio flows to China just last week.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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