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Sunset Market Commentary

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Global core bonds recovered some lost ground today with German Bunds outperforming US Treasuries. Disappointing Spanish and (regional) German inflation data triggered Bund strength. EC confidence remains at an elevated level, but recorded an 8th straight decline and printed also below consensus. US eco data (PCE inflation, weekly jobless claims, personal income/spending data) were spot on forecasts and didn’t alter today’s trading picture. Risk sentiment on (European) stock markets was shaky, with indices correcting lower for the first time since mid-August. End-of-month extension flows make the positive core bond picture complete. German yields lose 2.3 bps (2-yr) to 4 bps (belly of the curve). US yield declines range between -1 bp (2-yr) and -2 bps (5-yr) with the belly of the curve also outperforming. Peripheral bonds underperform vs Germany in today’s risk-off session with Greece and Italy (+14 bps) being worst off. The Italian 10-yr yield spread (285 bps) now approaches the post-election high (290 bps) despite a well-received Italian BTP auction today. Portuguese and Spanish spreads add 5 bps.

Today, the dollar initially held tight ranges even as there were plenty of eco data both in Europe and in the US. EC confidence data were softer than expected and German HICP inflation (1.9% vs 2.1% expected)printed also below consensus. US data (spending and income, price deflators and jobless claims) were almost completely in line with expectations. Bunds outperformed US Treasuries, widening the interest rate differential in favour of the dollar. Initially this wasn’t enough to inspire any clear directional price action in EUR/USD. However, this time US equity futures failed to reverse the risk-off mode that dominated trading in Asia and Europe. EUR/USD finally turned south. The pair is currently changing hands in the 1.1665 area. The safe haven yen is also a better bid across the board. USD/JPY is drifting lower in the 111 big figure (currently 111.40 area). EUR/JPY reversed yesterday’s gain and struggles not to fall below the 130 mark. Several EM currency also feel growing headwinds.

Yesterday, sterling succeeded a surprise rebound. The move was said to be due to ‘soft’ comments from EU Brexit negotiator Barnier. EUR/GBP dropped below the 0.90 mark. Today, the quotes from Barnier (and also from other parties involved in the process) were less ‘soft’. Barnier ‘hedged ‘ yesterday’s comments with the assessment that the EU must prepare for a no-deal scenario even if the goal is to reach an orderly brexit. Sterling hardly reacted to those ‘less soft’ comments of Barnier. This confirms the view that yesterday’s sterling rebound was in the first place a technical, order driven squeeze in a market that was positioned ‘sterling short’ rather than a reaction to the Barnier comments. In the same context, sterling also ignored weak UK July lending data (consumer credit and housing related credit). Still sterling maintained most of yesterday’s gain. EUR/GBP even lost further ground in line with EUR/USD. The pair trades in the 0.8970 area. Cable hovered closed to, mostly slightly north of 1.30.

News Headlines

German CPI (EU Harmonized) unexpectedly declined in August from 2.1% to 1.9% (YoY). Market consensus expected inflation 2.1%. In Spain, the HICP inflation also eased from 2.3% Y/Y to 2.2%. The data suggest downside risks for the EMU CPI release expected tomorrow.

Argentina’s central bank has increased its interest rates by 15 percentage points to 60%. The move came after its currency fell 15% in early trading today. The central bank’s rate hike follows the comments of president Mauricio Macri yesterday, asking the IMF to speed up the disbursement of its $50bn bailout package.

China announced new measures to support its economy, as an escalating trade war with the US threatens Chinese exporters. China’s cabinet said today those measures should reduce firms’ costs by over $6.5bn, by speeding up infrastructure spending and offering help to smaller companies.

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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