Sunrise Market Commentary

Markets

A violent sell-off hit UK Gilts as local markets reopened following Monday’s Spring Bank Holiday. In a catch-up move to weakness in core bonds on Monday, UK yields jumped 9 to 10 bps across the curve. Contrary to the move in the EU and the US, the curve move was a parallel shift rather than bear flattening. The UK 30-yr yield hit its highest level since May 1998 (5.78%). The UK 10-yr yield moved back above 5% and came within 2 bps from the highest level since June 2008. This set-up suggests that Bank of England governor Bailey better avoids being too complacent on the need to tighten monetary policy in the face of looming inflation risks. Especially given the fragile political situation with the ruling Labour party set to lose big in tomorrow’s UK local elections. It might be the straw that breaks PM Starmer’s back while also raising questions around Chancellor Reeves’ authority to pursue fiscal discipline. Sterling didn’t suffer from rising UK risk premia with a new bullish shift in risk sentiment adding some counterweight.

Key European and US benchmarks gained 1-2% as oil prices erased Monday’s increase. Brent crude is back at where it started the week ($108/b). Markets took comfort from US comments that the ceasefire was still in place despite a day of clashes around Hormuz after US President Trump announced the start of “Project Freedom”. Iran’s foreign minister immediately labeled it “Project Deadlock”. The US didn’t walk its talk that any new Iranian violence would be met with great US fury. It’s also telling that President Trump after two days already said that he would pause the project to guide ships through the Straight, boasting “great progress” toward “a complete and final agreement with representatives in Iran”. The latter not being confirmed from the Iranian side. High-level talks between Iran and China suggest something might be brewing when US President Trump and Chinese President Xi Jinping meet next week.

Asian stock markets extend their rally this morning with South Korea significantly outperforming thanks to Samsung. The company hit the $1tn valuation mark on the memory chip boom. Japanese markets remain closed for holidays, but that didn’t stop officials from more FX interventions. They pushed USD/JPY from 158 to 155 as the current JPY-valuation remains out of line with fundamentals. As long as oil prices stay this high, we fear Japanese officials to fight an uphill battle. Today’s eco calendar contains the monthly ADP employment report. Weekly data suggest another solid outcome which could trigger more repositioning on US money markets. Since last week’s Fed meeting, they went from erring on the side of a rate cut as the next central bank move to erring on the side of a hike. The US quarterly refunding announcement might draw some attention too in light of huge and still rising US budget deficits. In line with the situation in the UK, watch out for any vulnerability at the (very) long end of the curve. The US 30-yr yield at the end of last week briefly moved beyond the psychological 5% barrier.

News & Views

South Korean inflation accelerated in April to 0.5% M/M and 2.6% Y/Y, the fastest pace since July 2024 (from 0.3% M/M and 2.2% Y/Y). Core inflation was unchanged at 2.2%. Transportation costs rose 3.4% M/M. Prices for recreation and culture added 1.5%. Food prices declined by 0.9% M/M to slow to 0.3% Y/Y. Inflationary tendencies were slowed by government measures to cap the rise in fuel prices. The Bank of Korea (BoK) indicated that it expects inflation to rise further in May as higher oil price might feed through to other products. Yesterday, the deputy governor of the BoK suggested that the combination of ongoing resilience in economic activity and higher inflation might cause it to consider raising rates. The BoK kept its policy rate unchanged at 2.5% since May 2025. It meets next on May 28.

Over the previous session, the NOK/SEK cross rate challenged the psychological parity barrier and touched the highest levels since end may 2024. The NOK outperformance over the SEK comes as both central banks will announce results of their regular policy meetings tomorrow. At its March meeting, the Norges Bank indicated that the inflation outlook might make It appropriate to raise the policy rate at one of the forthcoming meetings. Money markets see a 50% chance for a 25 bps move tomorrow, with a hike fully discounted by June. A high oil price also supports NOK outperformance. Regarding the Riksbank, expectations that it might give in to rate hike pressures are much more modest. The central bank at its previous meeting signaled that it expected the policy rate to stay at 1.75% for some time to come, even as uncertainty is high. This assessment was supported by modest March CPI figures. April CPI figures will be published today.