HomeContributorsFundamental AnalysisSunset Market Commentary

Sunset Market Commentary


Global core bond weakness initially persisted this morning. Both the Bund and the US Note future reached in an intraday low as UK CPI inflation unexpectedly rose to its fastest pace in 6 months. The move in the Bund coincided with a test by the German 10-yr yield of the upper bound of the 0.3%-0.5% trading range. The test was rejected in absence of eco/event news. European stock markets couldn’t build on this morning’s Asian euphoria, Brent crude slides back towards $78.5/barrel and BTP’s suffered a small setback as 5SM Di Maio is reportedly looking for a bigger deficit (2.5% of GDP) than eyed by FM Tria and Lega Salvini. Core bonds found a better bid at the start of US trading, but the move lacks momentum. US eco data printed mixed with stronger-than-expected housing starts, but disappointing building permits in August. Changes on both the German and US yield curves are limited between -1 bp and +1 bps. 10-yr yield spread changes vs Germany widen slightly with Italy (+5 bps) underperforming.

USD trading showed a similar, inconclusive trading pattern as was the case earlier this week. Markets of risky assets reacted rather muted to the most recent escalation in the US-China trade war. In this respect there was no need to run to the safe haven dollar. US housing data were mixed to slightly better than expected, but are no focus for USD trading. US/German interest rate differentials are trading near a multi-year peak, but the spread also hardly didn’t move today. EUR/USD came again close to the 1.1720 area but a break/test of the 1.1733 resistance again didn’t occur. The pair returned to the 1.1675 area. Contrary to previous days, sentiment on Italy turned more neutral and was no support for EUR/USD anymore. USD/JPY again hovered in a very tight sideways range in the 1112.20/45 area. There is still not one decisive narrative to give USD trading any clear directional bias.

The focus for sterling trading was on the EU summit in Salzburg. Investors were looking out for signs of progress on a Brexit separation deal. In the meantime, the UK August CPI printed higher than expected at 2.7% Y/Y (from 2.5%), the highest level in six months. EUR/GBP spiked lower from the 0.89 area to the 0.8860/65 area. However, sterling soon reversed part of the initial gain as markets realized that this inflation uptick won’t change the BoE’s rate hike intentions in the pre-Brexit era. Later, sterling reversed all of the CPI-inspired gains on press headlines that PM May would reject the improved EU offer to address the issue of the Irish border. For now, there is no concrete news on any new developments at the EU summit. EUR/GBP hovers in the 0.8885 area. Cable eased back in the 1.3130 area after trading temporary north of 1.32 this morning.

News Headlines

UK inflation increased unexpectedly in August. On a monthly basis, CPI increased with 0.7% (0.5% expected) in August against a 0.0% break-even in July. Core inflation (YoY) grew 2.1% last month (1.8% expected) in comparison with 1.9% in July, indicating the price inflation is this time not due to a rise in energy or food prices alone.

UK Prime Minister May is said to reject the EU’s improved stance on the Irish border issue, according to The Times. EU’s negotiator Barnier had signaled he was ready to raise EU’s effort to address UK’s concerns on Northern Ireland. May will defend her ‘Chequers’ stance at the EU-summit in Salzburg, which starts tonight.

Italy’s Deputy Prime Minister Luigi Di Maio, leader of the Five Star Movement, is looking for an extra €28 billion for the 2019 budget, including €10 billion to fund the so-called ‘basic income’. His plans ought to raise Italy’s deficit-to-GDP ratio to 2.5%, which is higher than the previous 1.6% estimation of Finance Minister Tria.

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.

Featured Analysis

Learn Forex Trading