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Sunset Market Commentary

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Summer trading conditions kicked in on core bond markets today. The improvement in risk sentiment and heavy (expected) EMU and US bond supply pulled core bonds somewhat lower confirming the tentative topping off pattern in both contracts. A disappointing German ZEW-indicator and mixed-to-weaker national EMU production data failed to impact trading. June NFIB small business optimism surprised on the other side of forecasts and continues hovering near all-time highs. The German yield add 0.5 bps (30-yr) to 1.5 bps (5-yr) at the time of writing. Changes on the US yield curve range between +0.7 bps (2-yr) and +2.1 bps (10-yr). 10-yr yield spread changes vs Germany are close to unchanged with Spain, Portugal and Greece (-4 bps) outperforming. Italian spreads widened very temporarily after European affairs minister Savona turned the argument by saying that Italy should be ready if other EMU countries exit the euro.

A continued moderate positive risk mood once again proved to be the key driver in a rather uneventful trading day. The euro, however, wasn’t able to profit from the current risk-on environment as the dollar rebound that started yesterday, continued. A disappointing ZEW-indicator, although of secondary importance, if any, wasn’t much of a support for euro trading either. EUR/USD gradually edged lower throughout the day as the dollar held sway. The pair dipped below the 1.17 big figure – a test it later rejected – and is currently hovering around the 1.1710 area. The trade-weighted dollar is drifting north of the 94.2-resistance level. In contrast to the previous days, the risk-on sentiment is finally taking its toll on the Japanese yen, with USD/JPY attempting to settle above the 111 area (currently 111.18).

The negative effect of the UK political crisis on sterling is already wiped out. It could be a signal that markets start seeing it as the beginning of the next negotiation phase with the EU rather than the end of the UK government as PM May finally shut down the hard brexiteers. Disappointing May industrial/manufacturing production data and a smaller than forecast decline in the trade deficit didn’t stop the intraday sterling rebound. GBP/USD tested the 1.33 mark while EUR/GBP dropped towards 0.8820.

News Headlines

Hungarian inflation rose to 3.1% in June, coming from 2.8%. It has been 5 years since inflation was higher than 3% – the midpoint of the central bank’s 3% +/- 1%-point target. However, as Hungarian Finance minister Varga pointed out, the price rise was mainly driven by volatile energy prices.

Visco, Italy’s central bank governor, told the new anti-establishment government to “administer [public investments] with care” to avoid an increase in debt and possibly unnerving financial markets. He further said it would be risky to rely on such measures to kick-start the economy.

German ZEW investor sentiment disappointed in July. Both the headline and forward looking expectations components printed declined more than forecast. Trade tensions between the US and many of its partners turned out to be a mood killer.

Brent crude oil rose above $79/barrel after hundreds of Norwegian offshore oil and gas workers went on strike after rejecting a proposed wage deal. It’s the first such strike since 2012.

KBC Bank
KBC Bankhttps://www.kbc.be/dealingroom
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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