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Sunset Market Commentary

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Global core bonds lost ground today with US Treasuries strongly underperforming German Bunds. General risk sentiment improved substantially with the US-China trade war on hold for at least three months. Asian and European markets opened higher causing investors to abandon safe havens. Several Fed heavyweights spoke today, striking a note of caution and perhaps helping US Treasuries’ comeback at the time of writing. German Bunds already paired intraday losses early in European trading without obvious driver. The final reading of European manufacturing PMI’s was slightly revised upwards but had little impact on trading today. Meanwhile, signals of a growing Italian willingness to alter its 2019 budget deficit pushed the Italian BTP futures higher. Italian media reported that Deputy PM’s Di Maio and Salvini are ready to accept new budget deficit targets. The Italian spread over the German 10-yr yield falls back to 280 bps. German yields rise with changes between +0.1 bps (30-yr) to +0.5 bps (10-yr). US equity markets opened with gains around 1.5%. US yields add 3.9 bps (5-yr) to 2.1 bps (30-yr) across the curve.

The usual beneficiaries such as the euro couldn’t profit from today’s risk-on environment following the Trump-Xi Jinping armistice. EUR/USD initially did trend higher, boosted further by reports that the Italian PM Conte is preparing for a deficit of only 1.9%-2.0%. Such a move would indeed satisfy the EC’s demand and clear Italy from the worry radar at least for the short term. The overall positive momentum soon lost some of its mojo however. Investors welcome the recent developments in the trade conflict but rightly stay cautious ahead of difficult trade talks. EUR/USD peaked in morning trading hours before forfeiting virtually all of today’s gains. Clarida’s interview largely went unnoticed. The Fed vice chair said the economy is in a good shape and the (US) outlook looks very solid. He stressed the symmetric aspect of the inflation target, saying the Fed could operate “somewhat above 2% inflation”. On forward guidance Clarida suggested to keep the dot plot but its use/appearance might evolve over time. The pair changes hands near opening levels at 1.134. USD/JPY’s morning rebound lacked conviction and is trading in the 113.5-area. The Chinese yuan holds on more tightly to recent gains, trading at 6.88 USD/CNY.

Sterling’s attempt to recover from Friday’s last minute hit failed despite today’s risk-on climate. A stronger (53.1) than expected (51.7) manufacturing PMI wasn’t able to change the pound’s fortune. Investors are fully focused on the crucial Brexit vote in the British Parliament next week. The Labour Party threatening with a vote of no confidence should Parliament reject the current deal, discomforts markets. Sterling also braces for the UK Attorney General Cox to give a “full and reasoned statement” on the legality of Brexit later today, despite requests of MP’s to publish his legal advice in full. Stakes are high, especially for the hard brexiteers since reports suggests that Cox in his advice warned the UK could be trapped “indefinitely” in a customs union with the EU. That would add further fuel to the fire and damage May’s campaign to broker the Brexit deal to Parliament. EUR/GBP is hovering near 0.892. Cables’ moves are significantly larger, filling bids at an 1.282 intraday high only to fall sharply to around 1.27 currently.

News Headlines

The ECB adopted legal acts on the regular five-yearly adjustment to its capital key and the contributions paid by the national central banks of the EU. These changes will have an impact on the ECB’s reinvestment policy which uses the capital key as distributive code. Italy, Portugal, Greece and Spain will have lower capital key’s going forward.

Qatar said it will leave OPEC next month. The Gulf state indicates that it wants to focus on its liquefied natural gas production. The troubled relationship with Saudi Arabia is probably at play as well.

The US manufacturing ISM rose from 57.7 to 59.3 in November, way above 57.5 consensus.

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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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