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Sunset Market Commentary

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Global core bonds gained ground today with US Treasuries outperforming German Bunds. Risk sentiment deteriorated this week as the IMF has cut its 2019 global growth outlook and as the positivism around the US-Sino trade talks is fading. Core bonds opened higher on safe haven bids. The German ZEW Survey Expectations printed ‑15.0 in January, higher than expected and the UK printed decent labour data. European equities rebounded temporarily, causing bonds to (temporarily) pair some of their intraday gains. At the time of writing, the German yield curve bull flattens with changes ranging from -0.2 bps (2-yr) to -2.6 bps (30-yr). US investors joined dealings again after staying on the sidelines yesterday in remembrance of Martin Luther King day. Strong US Treasuries and lower US equity futures predicted a lower opening for US equities correctly. The US yield curve is moving south with changes varying between -3.2 bps (2-yr) to -4.5 bps (10-yr). Investors also eyed the Spanish syndication of a new 10-year bond. The Spanish treasury registered a record demand (€46bn). The selling amount is expected to be set close to €10bn and a final spread of 65 bps above midswap. The Spanish spread over the German 10-yr yield tightens cautiously (-2 bps), other peripheral spreads remain steady.

EUR/USD continued to hover around recent lows. This morning, EUR/USD declined slightly below the 1.1350 handle, but there was little follow-through price action even as European equities traded with a negative bias. ZEW German investor confidence (current situation) declined more than expected, but a bottoming in the expectations component might provide a glimmer of hope. A substantial decline in US yields after yesterday’s holiday maybe also prevented a real USD rally. In a global risk-off session EUR/USD (currently 1.1345 area) still struggles to prevent a further drop toward the 1.1309 support. USD/JPY is losing modest ground and is changing hands in the 109.40 area.

After taking a breather on Friday and yesterday, sterling again tried to extend its recent comeback. Investors still ponder the political chances of a longer delay of Brexit. Over the previous days, there was also growing speculation that at some point, the UK labour party might support a new referendum. At least for now, some parties in the market see the growing chances of this scenario as a GBP positive, too. Last but not least, even the UK data came out sterling supportive. Job growth (141k on a 3M/3M basis), the unemployment rate (decline to 4.0%) and wage growth (3.4% from 3.3%) all pointed to a healthy job market despite lasting uncertainty on Brexit. For now, the BoE’s hands are tightened as long as there is no clarity on Brexit. Even so, sterling reacted, albeit modestly, to the data. EUR/GBP is trading in the 0.8785 area. Cable regained the 1.29 level even as the dollar is also well bid.

News Headlines

The November job report revealed ongoing strength on the UK labor market. The unemployment rate dropped unexpectedly to an historic low of 4.0% while employment grew a 141 000 new jobs. Wages (ex-bonus) increased at a cycle high rate of 3.3%, further underpinning real wage growth.

The European Commission rebuffed Poland’s proposal to a 5 year limit of the Irish backstop arrangement after it kicked in from the end of 2020 if no all-round deal is in place. Poland’s foreign minister Czaputowicz said to his British and Irish colleagues on Monday they could consider such a limit.

The European Commission fined Mastercard €570 million for blocking cross-border competition. According to Vestager, EU Commissioner for Competition, the 2nd largest card scheme in the EEA abused its dominance to prevent merchants from “shopping around for better conditions [fees] offered by banks in other member states”.

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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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