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Sunset Market Commentary


The downtrend on global core bond markets simply continued today as risk sentiment thrived. Trading was sentiment-driven and technically inspired. Strong US eco data (weekly jobless claims & Philly Fed business outlook) contributed to US Treasuries’ underperformance vs German Bunds. The German 10-yr yield bumped into 0.5% resistance for a second straight session and helped limit losses in the Bund. We wonder how long this resistance level will hold in the current market environment. Brent crude briefly spiked lower as US President Trump blasted OPEC, but the oil price soon recovered. The US yield curve bear flattens at the time of writing with yields 2.1 bps (2-yr) to 1.2 bps (30-yr) higher. The US 2- and 5-yr yields set new cycle highs at 2.82% and 2.97% respectively. The US 10- and 30-yr yields close in on the cycle peaks at 3.12% and 3.26%. We eye a test going into next week’s FOMC meeting, where the Fed is expected to confirm the June dot plot, which is still more hawkish than markets are currently positioned, especially for 2019 and 2020. Increases on the German yield curve are limited to +0.6 bps. Peripheral yield spreads vs Germany narrow by 2 to 3 bps.

Over the previous days, the euro showed already quite resilient and EUR/USD tried to regain the 1.17 big figure, but the attempt failed. The dollar lost some momentum as tensions on global markets eased. Today, sentiment on (European) equity markets improved further. China indicating a possible decline in import tariffs maybe supported sentiment. This time, it was enough to trigger a EUR/USD short-squeeze. EUR/USD finally cleared the 1.1722/33 resistance, causing further stop-loss buying. US data (Philly Fed outlook and jobless claims) were strong and US yields/interest rate differentials rose further. However, it didn’t help the dollar. Risk sentiment prevailed. EUR/USD trades in the 1.1770 area. Remarkably, also USD/JPY didn’t profit from higher US yields and a risk-on sentiment. USD/JPY trades in the 112.10 area.

Today, sterling recorded a nice rally. The move was inspired by good UK data. Some investors also saw tentative positive signs coming from the EU summit in Salzburg. EUR/GBP traded in the 0.8890 area this morning, but soon took the way south. UK August retail sales were better than expected (0.3% M/M) and a strong July figure was still upwardly revised suggesting a nice contribution from consumption to Q3 UK growth. The news flow from Salzburg was mixed, at best. There were few indications of substantial progress on a solution for the Irish boarder. At the same time, there are headlines on a Brexit summit scheduled for November. Question remains whether this is a guarantee that key issues will be solved at that time. Whatever, sterling extended gains. EUR/GBP trades in the 0.8860 area. Cable is changing hands just below 1.33.

News Headlines

UK retail sales unexpectedly grew last month caused by a hot summer and an improvement in real income. Retail sales rose 0.3% in August, compared to the median estimate of a 0.2% decline. The July numbers were also revised upwardly. Almost all sectors note an increase, with household goods outperforming other sectors.

Norway’s central bank raised its interest rates for the first time since 2011. The Norges Bank added, as expected, a quarter point to its benchmark rate, raising it to 0.75%, taking the first step in the normalization of its monetary policy. However, it outlined a slightly more dovish rate path for the future. The krone lost ground on the news.

US President Trump expressed his dissatisfaction on the high oil prices again. In a tweet, Trump urged OPEC to lower prices immediately. He said the US is protecting the countries of the Middle East and will not forget these nations are continuing to push for higher oil prices. The current oil price stands at $79.4 per barrel.

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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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