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Sunset Market Commentary

Markets:

Yesterday’s trends simply continued today amid a very thin eco calendar. Core bonds remain under pressure with Bunds underperforming US Treasuries as investors reposition into next week’s ECB meeting. Rumours and comments pulled forward bets on a first ECB rate hike from Q1 2020 to Q4 2019. We think that this positioning is still to dovish. German yields increased by 0.2 bps (2-yr) to 3.1 bps (10-yr). The German 10-yr regained the 0.46%/0.47% mark, entering a new range topped by 0.65%. The US yield curve marginally bear flattened with yields 1.1 bp (2-yr) to 0.8 bps (30-yr) higher. Peripheral yield spreads narrowed by up to 8 bps for Greece, Spain and Italy.

The single currency remains upwardly oriented, but the ECB-induced short squeeze in EUR/USD lost traction. The pair is currently testing the 1.1830 resistance area. Eco data included the details from Q1 EMU GDP and US weekly jobless claims. The former showed stronger than expected consumption (+0.5% Q/Q) while investments slightly disappointed (+0.5% Q/Q). Weekly jobless claims continue to hover near cyclical low levels (222k), confirming tightness on the US labour market. Neither influenced intraday dynamics.

EUR/GBP rose from the 0.8780 area towards 0.8840. After a week of bickering, the UK government published a long awaited note on the Irish backstop (proposal to avoid a hard border with temporary customs arrangement) in the Brexit negotiations. Any agreement should be “time limited” and new, final, arrangements should be in place by the end of 2021. The latter is a concession from May to hard brexiteers and probably why sterling is under some minor selling pressure. The note remains rather vague overall and merely suggests that the government is kicking the can down the road.

News Headlines:

“Czech interest rate should already be above 1% as the economy is feeling the effects of overheating”, central bank vice-governor Hampl said in an interview. Governor Rusnok earlier this week said that a weaker than expected CZK and building inflation pressure warrant sooner-than-forecast and additional rate hikes this year. The June 27 meeting is a likely candidate to hike the policy rate from 0.75% to 1%. CZK and EUR strength currently cancel each other out with EUR/CZK trading around 25.65.

Turkey joined a string of emerging-market central banks whose interest-rate decisions have surprised investors, tightening policy – for the third time in less than two months. They raised the one-week repo rate from 16.50% to 17.75%. The lira surged with EUR/TRY declining from 5.43 to 5.30.

Brazil’s central bank again increased its intervention in the currency markets as the real slumped towards the psychological 4.00 per dollar level. The central bank announced it would offer up to an additional 40,000 foreign exchange swap contracts Thursday. It normally auctions 15,000 contracts a day.

German industrial orders unexpectedly plunged due to weak demand from domestic and euro zone clients in April    (-2.5% M/M vs 0.8% M/M consensus), posting their fourth straight drop on the month, as growing uncertainty about a global trade war led companies to scale back investment plans.

KBC Bank
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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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