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Sunset Market Commentary


Global core bonds traded mixed today with US Treasuries stabilizing near Friday’s post-payrolls sell-off lows and German Bunds ceding more ground. The first down leg in the Bund occurred as Italian BTP’s extended their strong run after reassuring comments from Italian FM Tria over the weekend. He said that Italy won’t breach EU rules with its 2019 budget and try to keep the debt-to-GDP ratio on a (modest) downward trajectory. The Italian 10-yr yield spread vs Germany narrows by 12 bps to 253 bps, the lowest level of the past month and near the middle of the post-election trading range (210-290 bps). Other intra-EMU spreads declined by up to 2 bps with Portugal (-5 bps) and Greece (-12 bps) outperforming as well. The second, smaller, setback in the Bund occurred via weakness in the UK Gilt market after EU chief negotiator Barnier indicated that getting a Brexit deal within 8 weeks was realistic. The German yield curve bear steepens with yields 0.5 bps (2-yr) to 2.3 bps (30-yr) higher. The US yield curve flattens slightly with yield changes ranging between +0.4 bps (2-yr) and -0.7 bps (30-yr). The curve move suggest some minor follow-up action after Friday’s upbeat wage data. European stock markets managed to overturn negative risk sentiment on stock markets despite US President Trump upping the ante in the US/Chinese trade conflict.

Today, the dollar couldn’t build on Friday’s post-payrolls’ gain. EUR/USD still touched a minor ST correction low in the 1.1525/30 area early in European trade. However, the minor support area couldn’t be broken. European markets didn’t join the caution from Asia/EM markets. Sentiment improved throughout the day and prevented further USD gains. The euro gradually rebounded in line with European equity markets. Italian markets outperforming probably was a euro supportive factor, too. There were few eco data in Europe or the US. In the afternoon, the euro was additionally supported by constructive comments from EU’s Barnier on the chances for a brexit deal. EUR/USD rebounded north of 1.16. So, most of the post-payrolls gain of the USD was quite easily reversed. The constructive risk sentiment was also marginally supportive for the USD/JPY cross rate. The pair trades in the 111.15 area.

At the end of last week, the sterling still profited from some kind of short-squeeze as investors were inclined to reduce sterling short positions on perceived signs that the EU and the UK might move to a softer approach in order to facilitate a brexit deal. Today, the focus turned temporarily to the UK eco data. The UK July production data printed on the softer side of expectations. However construction and services output was strong, contributing to a strong GDP estimate for the 3months to July (0.6% 3M/3M). Sterling ignored the data. EUR/GBP even gained a few ticks and settled in the 0.8950 area. Later in the session, the market returned to last week’s trading pattern as the brexit narrative resurfaced. At a conference in Slovenia, EU brexit negotiator Barnier was quoted that a brexit deal is realistic and possible within eight weeks. EUR/GBP dropped to the low 0.89 area. Cable jumped back above the 1.30.

News Headlines

EU’s brexit negotiator Barnier said it is realistic to believe that a deal will be struck with the UK on brexit in six to eight weeks. That timing would mean late October or early November. Barnier added however that several issues were left unresolved, such as measures to prevent a hard Irish border. Sterling jumped higher on the news.

Republicans in the US house of Representatives plan to unveil another round of tax cuts this week. “Tax Reform 2.0” is intended to augment Trump’s 2017 fiscal stimulus with $576 billion, which added already $1.5 trillion to the federal deficit. That amount could rise if Republicans make some of the original tax cuts permanent.

The UK economy grew faster than expected, with a GDP growth of 0.3% (MoM) in July, with only a 0.1% increase expected. This resulted in a rolling three month growth of 0.6%, against 0.5% expected. Larger than expected retail trade (+2.1%) outweighed the contraction in manufacturing (-0.1%) and industrial production (-0.5%).

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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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