Sunset Market Commentary

Markets

• The resumption of oil through Saudi Arabia’s East-West pipeline probably prevented Brent crude prices from targeting $110/b today. That was the way we were headed before news broke that flows through the pipeline have reached about 50% of max capacity (7 mln a day) again after being reduced to zero following drone attacks earlier this month. The East-West pipe has been crucial in bypassing the Strait of Hormuz, using the Red Sea exit instead. Brent crude slides from around $109/b to $106/b after being pushed higher initially on US President Trump’s rejection of the Iranian 7-day truce proposal. The WSJ even reported on rumours about resuming the military campaign after the US mid-terms.
• Core bonds remain in sell-off mode. Daily changes on the US yield curve range between +4 bps and +6 bps with the belly of the curve underperforming the wings. Longer tenors are pushing through to new multi-year highs. The normalization of term premia/real rates remains the driving factor behind the move with inflation expectations, especially in the US, broadly stable since the Fed restored its credibility with a rate hike. The EU swap rate curve bear steepens (30-yr +4.5 bps), setting new cycle highs from tenors of 3-yr up until 30-yr. ECB President Lagarde triggers some cautiousness at the front end arguing that a measured ECB response is still the appropriate one. The UK Gilt curve bear flattens with yields up to 7.7 bps higher at the front end. Bank of England Deputy Governor Ramsden joins a rising chorus of warnings on the deteriorating inflation outlook. At this month’s BoE meeting, he still supported the status quo and earlier this year he was in the minority camp calling for a rate cut. In a speech focusing on the next chapter in the central bank’s quantitative tightening chapter, he also touched on the Bank rate. If upside pressures on the inflation outlook continue to build, there’s a case for a rate hike. UK money markets currently attach a 90% probability to action in November. Risk sentiment remains rather resilient despite the new bond sell-off. Key European stock gauges are currently 0.5% higher with the US benchmarks opening 0.5% lower. The dollar holds a small advantage in FX space with EUR/USD currently changing hands at 1.1370.
• The Belgian debt agency raised the maximum of the intended €2.6-€3bn range via its monthly OLO auctions today (€1.03bn 3.1% Aug2031; €0.87bn 2.85% Oct2034; €1.1bn 3.4% Jun2036). The auction bid cover was 1.7. Thanks to today’s sale, the BDA raised €47.65bn YtD compared with a €51.6bn OLO funding need (92.35%).

News & Views

• Belgium’s Federal Planning Bureau warned not to accumulate large current account deficits over many years as these must be financed by foreign capital. This dependence may become a source of vulnerability if foreign investors suddenly withdraw their funding, which in turn could lead to a substantial rise in interest rates. The Bureau noted that the current account shifted from a large surplus in 2007 (4.5% of GDP) to a significant deficit in 2025 (-1.9% of GDP). It attributed the reversal to two factors. One is the sharp deterioration in the terms of trade for goods, resulting from higher energy import prices and the limited pricing power of Belgian exporting firms. The other is the substantial deterioration in the services volume balance, largely reflecting developments in the travel balance. From the perspective of the institutional sectors, the deterioration in the current account chiefly reflects the growing government deficit and lower household savings.
• The Turkish government led by Erdogan will discuss the country’s fund crisis later today. Its Treasury and Finance minister Simsek is expected to announce a new set of measures, including providing liquidity to prevent spillovers to the financial system and economy. The fund industry crisis was triggered earlier this month by several asset managers unable to meet redemption requests, sparking wider liquidity concerns and prompting amongst others the central bank to step in. Regulators ordered the liquidation of 131 funds and authorities have arrested or detained several executives as part of ongoing investigations. The ruling AK party deputy chair also stepped down over the weekend after opposition allegations about stock trades involving her and her husband. Turkey’s main stock index Borsa Istanbul stabilized in the wake of the measures taken by regulators but is succumbing to selling pressure again today. The index drops around 3.5%, testing the March lows.