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Sunset Market Commentary

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Global core bonds extend losses today with US Treasuries slightly underperforming German Bunds. The first downleg in the Bund resembled yesterday’s move: continued BTP strength lifted European yields and the euro. Italian bonds still thrive on optimism about the upcoming budget (in line with EU rules according to official), but they are losing momentum. Stronger-than-expected German ZEW investor sentiment caused no additional harm. US Treasuries started slipping away in US dealings ahead of tonight’s mid-month refinancing operation. The US NFIB small business optimism hit a new all-time high, but also didn’t impact trading. US yields increase by 2.1 bps (2-yr) to 2.9 bps (10-yr) with the belly of the curve underperforming the wings. German yields add 0.8 bps (2-yr) to 2.7 bps (10-yr). 10-yr yield spread changes vs Germany narrow up to 3 bps with Greece outperforming (-14 bps)

Today, trading in EUR/USD was again haunted by the swings in risk sentiment. This morning, it looked that the euro could enjoy additional support from an overall constructive risk sentiment and/or from easing market worries on Italy. EUR/USD filled offers north of 1.1640. However, European markets weren’t able to extend this positive trade as underlying uncertainty on global trade and on emerging markets persisted. European equities and the euro soon reversed a constructive start. ZEW German confidence improved, but it didn’t help sentiment on European markets. EUR/USD returned below the 1.16 big figure. Headlines on China calling for WTO sanctions against the US only added to global uncertainty. Global equities and the euro lost further ground awaiting next steps in the US trade policy. EUR/USD is trading in the 1.1580 area. USD/JPY also reversed part of this mornings’ gain and trades near 111.40.

Today, there was again plenty of UK headline news. However, this time it didn’t help to guide sterling trading. UK labour data (unemployment rate, job growth) were close to expectations, but weekly earnings ex bonuses printed at a stronger than expected 2.9 Y/Y. This indicates a further return to positive real wages. If this trend continues, at some point, it will become a factor for BoE policy. However, for now, it was enough to inspire further sterling gains. Later, the Chancellor of the Exchequer announced that BoE’s Carney will leave to BoE only at the end of January 2020, instead of June 2019. However, this bid for a continuation of policy throughout a key brexit era also didn’t impress sterling investors. EUR/GBP held a tight sideways range in the low 0.89 area. Cable lost slightly ground and is drifting below the 1.30 barrier.

News Headlines

UK labor market remains solid. Wages (excluding bonuses) did rise 2.9%Y/Y in the May/July period. Only 2.8% expected. In July alone, wages increased 3.1%, the fastest pace since  2015. The unemployment rate remains at a record low of 4%. On the other hand, job growth was disappointing.

Philip Hammond, UK chancellor, announced that Mark Carney will extend his mandate as governor of the Bank of England until the end of January 2020, which is seven months longer than normally foreseen. Carney has to provide continuity to the British economy in the months after March 2019, when it leaves the EU.

China will present a case next week to the World Trade Organization as it seeks to retaliate against the US for its non-compliance with a previous WTO ruling in 2017 over US dumping duties. The request is likely to lead to years of legal discord between the two nations whom are already fighting a trade war.

German economic sentiment rose for a second month in a row, with ZEW expectations index rising from -13.6 in August to -10.6 in September against a median estimate of -13.0. This small improvement occurs in a period of currency crises in Turkey and Argentina and remains still well below the long-term average of 22.9.

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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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