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Sunset Market Commentary


Global core bonds extended their negative run today. German Bunds underperformed US Treasuries. The main move occurred in the European opening. The Bund downleg lifted the German 10-yr yield above the 0.5% resistance area to its highest level since May. A continuation of the BTP rally after La Stampa reported on a 1.9% 2019 budget deficit commitment and yesterday’s hawkish inflation comments by ECB President Draghi explain the move. Chief economist Praet suggested that markets misinterpreted the chair’s comments, but those same markets bluntly ignored him. Changes on the German yield curve range between -0.1 bp (2-yr) and +2.4 bps (10-yr). Peripheral yield spreads vs Germany narrow by 3 bps (Spain) to 9 bps (Italy). The US yield curve bear flattens marginally in the run-up to tomorrow’s FOMC meeting. Yields increase by 1.4 bps (2-yr) to 1.2 bps (30-yr).

Trading in the major USD cross rates developed as one could typically expect in a session devoid of high profile eco news and just one day before a Fed policy meeting with market moving potential. EUR/USD hovered up and down in the 1.17 big figure. The pair yesterday couldn’t maintain the gains triggered by Draghi’s hawkish inflation comments. The low 1.18 area proved to be a tough resistance. This morning, EUR/USD retried a downside test (1.1740 area) as ECB’s Praet downplayed yesterday’s inflation comments from his boss. However, this move also ran into resistance soon. In technical trading, EUR/USD drifted further north at the start of the US trading session. We didn’t see a clear story/trigger. A rise in the oil price maybe was a slightly USD negative. However, trading still developed within recent ranges. We see it mainly as order-driven trade ahead of tomorrow’s Fed policy meeting. EUR/USD is again trading in the 1.1780 area. USD/JPY is losing a few ticks despite a further rise in US yields. The pair just failed to fill offers at 113 and trades currently in the 112.80 area.

Today, there were no eco data in the UK. In a speech, BoE’s Vlieghe looked forward the process and the potential impact of unwinding QE. In the Q&A he basically confirmed the path of very gradual BoE rate hikes over the policy horizon. Yesterday, sterling already entered calmer waters after a new flaring up of Brexit turmoil after the EU summit last week. Today, sterling kept a wait-and-see bias. Comments on Brexit made at the labour party congress had no clear impact on sterling trading. EUR/GBP hovers in the mid 0.89 area. Cable gained a few ticks intraday at trades again in the 1.3150 area.

News Headlines

ECB’s chief economist Peter Praet downplayed President Draghi’s inflation comments from yesterday. Draghi talked about a relatively vigorous pick-up in underlying inflation, which led investors to speculate on a faster pace of policy normalization. Praet countered today by saying that the ECB’s view didn’t change since the last policy meeting.

Bank of Japan Governor Kuroda said it is the central bank’s desire to achieve the 2% inflation target as soon as possible so that monetary policy normalization can start. He added that it is time not only to acknowledge the benefits of monetary easing, but to look into the side effects of its massive stimulus program as well.

Stefan Lofven, Sweden’s Prime Minister, lost a confidence vote in parliament today. The leader of the Social Democrats remains outgoing PM as long as no new government is formed. Government formation proves to be hard as the populist Sweden Democrats threatens to block any new government unless they are given a say in policy.

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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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