Sun, Feb 05, 2023 @ 17:08 GMT
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Sunset Market Commentary


Global core bonds gained ground today. Two items played a role. First, the relief rally since last Thursday in the Italian BTP market ended. The Italian 10-yr yield spread vs Germany widened by 25 bps. Spanish/Portuguese spreads added 11 bps. Italian PM Conte’s maiden speech in parliament stressed willingness to execute the Lega-5SM coalition agreement without further ado. Some investors probably hoped for a more moderate approach. Second, oil price faced a new backlash as the US government reportedly asked Saudi Arabia and some other OPEC producers to increase oil production by about 1 million barrels a day. Brent crude declined from $75.5/barrel towards $74/barrel. German yields decline 1.3 bps (2-yr) to 4.3 bps (10-yr) with the belly of the curve outperforming the wings. The US yield curve shifts in parallel fashion with yields 2.1 bps (30-yr) to 3.4 bps (5-yr) lower.

The new stress on the Italian BTP market and lower oil prices both played in the card of a weaker EUR/USD. The pair returned below 1.1670 after setting an intraday high just below 1.1720 early in the session. The move remained rather subdued with lower core bond yields causing a balancing act.

Sterling outperformed today even if UK investors started the day with headlines that UK PM May won’t set out the UK’s detailed strategy to solve the Northern Irish dispute ahead of the June EU-UK Summit. Investors by and large shrugged off this umpteenth disappointment. A stronger than expected UK services PMI even rocked the queen’s money. EUR/GBP dropped from the 0.8885 area to 0.8730 and is again approaching the key support area around 0.87. GBP/USD reversed yesterday’s losses and changes hands around 1.3365.

News Headlines:

The US service industries expanded in May at a faster pace than forecast (services ISM 58.6 from 56.8 vs 57.6 expected) on stronger orders and sales, while a gauge of materials prices continued to advance.

The CNB may raise interest rates sooner than expected due to faster wage growth and a weaker-than-expected crown exchange rate, Governor Rusnok said. EUR/CZK dropped the past two days from 25.80 towards 25.60. (Reuters)

The UK services PMI recovered more than forecasted in May, rising from 52.8 to 54.0 (vs 53 consensus). However, forward looking indicators suggested that the economy could still relapse. The final EMU services PMI for May faced a small downward revision, from 53.9 to 53.8. April EMU retail sales disappointed (0.1% M/M), but the March figure was upgraded from 0,1% M/M to 0,4% M/M.

Former Spanish PM Rajoy says he will step down as president of People’s Party once new leader has been chosen: “It is time to bring an end to this period. The party should continue to move ahead under the leadership of someone else. That’s best for me and for the party”. (BB)

South Africa’s economy contracted at the sharpest rate in almost a decade in the first three months of the year (-2.2% Q/Qa), underlying the challenge confronting President Ramaphosa’s bid to revive growth. (FT)

KBC Bank
KBC Bank
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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