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Sunset Market Commentary

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Global core bonds are mixed today. German Bunds lose ground while US Treasuries trade near yesterday’s closing levels. US midterm election results came in broadly as anticipated: the Democratic Party re-gains power in the House of Representatives. Republicans strengthen their majority in the Senate. This means President Trump has to govern his next two years in a split Congress, probably causing less wiggle room to execute policy measures. Investors quickly returned to the order of the day after a volatile opening this morning. European equities opened higher though, preluding a day of improved risk sentiment causing German Bunds to gradually slip lower. Mixed EMU retail sales had little impact on trading. The US yield curve edges lower at the long end of the curve with changes ranging from -4.5 bps (30-yr) and +1.3 bps (2-yr). The German yield curve bear flattens with yield changes varying between +1.1 bps (30-yr) and +2.0 bps (2-yr). Spreads over Germany tighten with Greece (-6 bps) and Italy outperforming (-6 bps).

Global (FX) markets tried to assess the consequences of the US elections for US growth and for markets today. A divided Congress with the Democrats securing a decent majority (about 10 seats) is seen hampering the fiscal-driven outperformance of the US economy that dominated markets’/FX thinking this year. This potential reduction of fiscal stimulus weighs on US yields and on the dollar. The US currency is losing interest rate support and is declining against most majors. EUR/USD extends recent uptrend in the 1.1301/1.1615 trading range. The pair tested the 1.15 big figure but trades currently again slightly lower near 1.1470. After jumping higher this morning, USD/JPY drifted to an intraday low just below 113 but regained some ground as the positive risk sentiment prevents further yen gains. USD/JPY trades currently in the 113.25 area. Today’s USD correction is logic given the election outcome, even as it was more or less in line with expectations. Tomorrow’s Fed statement is the next point of reference for USD trading. We are keen to see the USD reaction, especially if the communiqué doesn’t give too much weight to recent market volatility and keep a hawkish tone on recent strong data. Will it bring the USD back in pole position?

Trading in EUR/GBP (currently 0.8735 area) and in cable (1.3135 area) was mainly driven by the global USD trends. The USD decline after the US election also propelled cable. At the same time, there was slight euro outperformance. of an imminent Brexit deal, from now, hard good news (from Brexit or from the UK economy) is probably needed to inspire further sustained sterling gains.

News Headlines

Brent crude rose from $72/barrel to $73.5/barrel today on rumours that Saudi Arabia and Russia are plotting oil production cuts in 2019 as a fresh surge of American shale risks outweighing a sanctions-related decline in Iranian output. The gossip comes in the run-up to this weekend’s OPEC+ meeting in Abu Dhabi.

The German Council of Economic Experts (GCEE) presented its annual report today. They expect the German growth rate to gradually cool down to potential growth in coming years. The GCEE made a stark warning to the ECB which risk being too late with the turnaround in monetary policy.

The Polish central bank kept its policy rate unchanged at 1.5% as widely expected. NBP governor Glapinski holds a press conference later today. Most Polish central bank members want to delay a first rate hike until at least the end of 2019 and preferably even into 2020.

Spanish PM Sanchez said he will change the mortgage law in order to overrule yesterday’s court ruling that Spanish lenders aren’t liable for mortgage stamp duty payments. Spanish financial stocks managed to cling on to opening gains despite Sanchez’s proposed U-turn.

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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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