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Sunset Market Commentary

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Global core bonds were mixed and little changed today  even as risk sentiment stayed positive. China and the US wrapped up three days of trade negotiations with both sides expressing that progress had been made. An official statement will follow tonight, but Chinese VP Liu He is expected to visit Washington later this month to continue more high-level trade talks. Atlanta Fed’s Bostic was his dovish self and estimates current rate levels close to neutral. He added that the government shutdown may hurt the growth projection of the Fed. Fed’s Evans also gave some balanced comments on the Fed’s normalization process. The release of FOMC meeting minutes of the December meeting are a wild card later today. The US yield curve is currently mixed with changes varying between -0.2 bps (5-yr) to +0.7 bps (30-yr). In the eurozone, the unemployment rate fell to 7.9%, the lowest level in over a decade. European equities continued the rally of late, while German Bunds prove to be resilient. The German yield curve edged cautiously lower with changes in the range of -0.2 bps (2-yr) to -0.1 bp (30-yr).

There was initially no compelling story to guide USD trading today with only second-tier data. Global risk sentiment stays positive as the US and China signaled a constructive tone at the trade negotiations in Beijing. The positive sentiment supported further gains of European equities, but didn’t really help EUR/USD. Yesterday, the pair came within reach of the 1.15 mark and this morning it looked that a retest was possible, but the move had no strong legs. Investors didn’t seen enough reason to attack the 1.15 barrier that proved quite solid of late. Early in US dealings, comments from Fed governors including Fed’s Evans (a voter this year) suggested that low inflation gives the Fed room to take a cautious approach on further tightening. The dollar came again under pressure and EUR/USD is again testing the 1.15 resistance at the moment of writing. In this respect, markets will also keep a close eye on the minutes of the December Fed meeting to be published later today. USD/JPY (108.55/60 area) is also drifting off the intraday ‘top’.

Sterling temporary gained a few ticks this morning. The ‘rebound’ occurred after a vote in Parliament yesterday made it more difficult for the UK government to implement a no-deal Brexit in case PM May’s agreement with the EU is rejected next week. There were also rumours that UK PM May tried to convince the DUP party to approve her deal by providing Northern Ireland ‘guarantees’ in case the backstop procedure on the Irish boarder would be activated. EUR/GBP dropped temporary to the 0.8975 are, but optimism faded soon as the DUP rejected the proposals. This afternoon, PM May faced another defeat on a Brexit-amendment in Parliament that will tie the government’s hands further in case the current deal gets rejected next week. EUR/GBP is regaining the 0.90 barrier as Brexit tensions return back into the spotlights.

News Headlines

Rating agency Fitch issued a warning of a possible cut of the US’s triple-A sovereign credit rating later this year should the government shutdown continue to March 1. This might force the agency to start “thinking about the policy framework, the inability to pass a budget … and whether all of this is consistent with triple-AAA”, in particular when the debt ceiling requires another lift.

Euro zone November unemployment unexpectedly fell to 7.9%, the lowest in a decade, while having the October number revised downwardly to 8%. The figure conceals a wide intra-EMU divergence however, with the Czech Republic (1.9%) and Germany (3.3%) on one side of the spectrum and Italy (10.5%) and Spain (14.7%) on the other. The report didn’t contain the Greek data yet.

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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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