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Sunset Market Commentary

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It was a typical quiet pre-payrolls European trading session on main FI and FX markets. A modest rebound in EM FX didn’t stroke with weakness on European stock markets from a risk point of view. The German Dax extends losses following this week’s break below 12100 support. Key support kicks in around 11725. Trading dynamics changed after the release of the August labour market report. Net job growth beat forecast by 11k (201k vs 190k expected), but June/July figures faced a combined 50k downward revision. Data nevertheless confirm ongoing strength on the US labour market. The unemployment rate stabilized at 3.9% (vs 3.8% consensus) with a drop in the participation rate. Average hourly earnings delivered the biggest surprise, accelerating by 0.4% M/M and 2.9% Y/Y, an expansion high and further evidence of building price pressure in the US economy. The market implied probability of two more Fed rate hikes this year increased from 63% to 68%. Markets reacted accordingly with both US yields and the dollar turning north. The US yield curve trades 3.2 bps (30-yr) to 5.4 bps (5-yr) higher at the time of writing. The US 2-yr yield tests the 2.68% cycle high. German yields add 1.4 bps (2-yr) to 2.7 bps (10-yr). The dollar’s gains are less impressive, in line with the lacklustre performance earlier this week given circumstances (risk aversion and strong US eco data). EUR/USD dropped back below the 1.16 handle (1.1573 currently), but the short term technical picture doesn’t change. USD/JPY returns above 111 following this morning’s safe haven yen gains as the WSJ suggested that Japan would be the next victim in Trump’s trade wars. Event risk remains tonight and this weekend with US President Trump possibly pulling the trigger on imposing another $200bn of tariffs on Chinese goods.

EUR/GBP initially held a tight range close to the 0.90 pivot. Halifax house prices were as expected (3.7%). Around noon, markets were spooked by Bloomberg headlines of quotes EU ‘s Barnier made in a meeting with UK policy makers early this week. Markets apparently considered it good news as the negotiator said the EU is prepared to simplify checks at the border between the Irish Republic and the UK. We doubt that the headlines should be considered as an indication that the EU and the UK are coming close to a comprehensive Brexit deal. Even so, sterling succeeded some nice gains upon the publication of the quotes. EUR/GBP dropped from the 0.90 area to the 0.8930 area. In our view, this is more an indication that the market is still positioned sterling short.

News Headlines

An official transcript of the divorce talks between Barnier and UK lawmakers on Monday was released, showing that the chief EU negotiator said lots of the UK’s blueprint for post-Brexit relations are useful and that he’s open to new ideas to fix the Irish border problem. The pound gained around 1% on the news.

Canada unexpectedly lost 52k jobs last month, following two strong months of gains (+54k in July). The 92k decline in part-time jobs outweighed the 40k increase of full-time positions, pushing unemployment up to 6.0% from 5.8% in July. Wage growth disappointed expectations (3.0%), with only 2.6% wage growth in August.

US labour market remains very strong, indicated by the latest data. Nonfarm payrolls rose 201k (190k expected). More importantly, US wages rose at their quickest pace in nine years (0.4% m/m, 2.9% y/y), suggesting a rise in inflationary pressure. This increases the probability that the Fed will raise interest rates two more times this year.

North Korea’s Kim Jong Un has put together a timeline for denuclearization. A full denuclearization would be reached by the end of US President Donald Trump’s first term (early ’21). However, no indication of concrete steps were given. North Korea insists the US takes simultaneous steps to reduce sanctions pressure.

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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