Sunset Market Commentary

Markets

A solid 10-year Japanese bond auction this morning calmed down global core bond markets jitters after yesterday’s rout. But the underlying market forces are quelled for now, not at all dead. With the BoJ normalizing policy, rising Japanese yields offer an increasingly attractive alternative in a market already stretched by a huge supply (government, corporate) & demand (exit central banks) mismatch which back all sorts of risk premia. Core bonds remain under pressure, be it not to the same extent as yesterday, with underperformance at the long end. US yields add up to 2.5 bps. Bunds marginally underperforming vs swap. The latter 10-year and 30-year variants hold around the 2.8% and 3.1% (+) cycle highs. The 2-year swap yield is pouncing on the 2.2% November high. European inflation numbers came in slightly above expectations at 2.2% and 2.4% for headline and core respectively. Services inflation rose to a 7-month high of 3.5%. If anything, they confirm the ECB’s expected prolonged status quo at 2%. French OATs lag peers today following reports that Lecornu’s social security budget won’t get backing by Horizons in an upcoming vote December 9. Being part of the coalition government, Horizon’s lack of support underscores the extreme fragility in French politics. Gilts in the UK live up to their reputation by underperforming whenever (credit) risk premia pop up. UK yields rise 1.1-3 bps, further undoing last week’s relief rally after Chancellor Reeves presented the (spend-now-pay-later) November Budget. Equity markets fare a bit better than yesterday. An improving risk appetite is pushing the likes of the EuroStoxx50 0.4% higher. A potential key market moving event, particularly for European (risk) assets, takes place after European closing hours though with US envoy Witkoff meeting Russian president Putin for talks starting 7pm CET. The outcome is anyone’s guess but a positive one may support CE FX in first instance but also the euro vs USD. EUR/USD currently is going nowhere around, 1.161. JPY fully wiped out yesterday’s gains by trading back around USD/JPY 156. Just as with gilts, sterling’s relief rally quickly ran out of steam. EUR/GBP is keen on recovering the 0.88 big figure again.

News & Views

The Bank of England (BoE) today published its semi-annual financial stability report. The Financial Policy Committee assesses that risks have increased during 2025. Key sources include geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets. Many risky asset valuations, especially in AI-related sectors are stretched. Corrections can spill over to broader credit markets with credit spreads considered stretched by historical standards. While the UK remains exposed to global shocks, UK household and corporate aggregate indebtedness is seen as remaining low. The UK banking system is well capitalized, maintains robust liquidity and funding positions, and asset quality remains strong. This allowed to central bank to reduce the Tier 1 capital ratio to 13% from 14%. In the context of heightened geopolitical tensions and continued advances in technology, the Committee underlines the critical importance of operational resilience on order to continue the provision of vital services to households and business. Regarding a specific topic related to market based funding, the Committee elaborated on rising leveraged borrowing by hedge funds in gilt repo markets. Activity of those funds rose close to £ 100 bln and at least part of it is related to a popular cash-futures base trade. A small number of hedge funds account for more than 90% of net gilt repo borrowing, with trades often at (near-)zero collateral haircuts and at very short maturities and so require regular refinancing. These vulnerabilities, in the context of compressed risk premia in a highly uncertain global environment, increase the risk of sharp moves.

Growth in South Africa increased by 0.5% Q/Q and 2.1% Y/Y in Q3, following a 0.9% quarterly rise in Q2. Trade catering and accommodation increased 1.0% Q/Q, mining and quarrying increased 2.3%. Financing, real estate and business services grew by 0.3%. The manufacturing industry increased by 0.3% while agriculture, forestry and fishing industry increased by 1.1%. On the demand side, household consumption increased by 0.7%, contributing 0.5ppt to the total growth. Gross fixed capital formation increased by 1.6% (after three negative quarters), contributing 0.2ppt. Net exports contributed negatively (-0.4 ppt) amid faster imports of goods and services by 2.2%. The reaction of the rand to the GDP data was modest. At USD/ZAR 17.11 the South-African currency maintains most of its post-Liberation/YTD gains (+ 10.1% YTD against the dollar; but a loss of 1.8% YTD against the euro).