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Sunset Market Commentary

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Global core bonds lost modest ground today. With an empty eco calendar during European trading hours, risk sentiment guided investors. Sentiment deteriorated overnight as the US announced it was officially pressing charges against Chinese tech giant Huawei. However, markets recovered in the run up to the European opening. EU equities opened cautiously higher and continued an upward trend through the day. The German Bund proved resilient and moved cautiously higher. The German yield curve moves were mixed as yield changes are varying between -0.7 bps (30-yr) to +0.9 bps (2-yr). US Treasuries behaved in a similar way and didn’t chose a clear direction. In the run-up to the US bell, US Treasuries edged higher. The US yield curve moved south with changes between -0.7 bps (30-yr) to ‑1.7 bps (10-yr). Bond traders’ focus was on supply too. Bond offerings from Belgium, Austria and Greece received large bids but had little impact on German Bunds. Belgium sold €5bn of the 30-yr bond, bringing the total amount raised this year to €11bn out of the total finance need of €28 bn in 2019.

Trading in the majors USD cross rates developed in wait-and-see modus today. Interest rates provided no clear guidance. The dollar traded in the defensive this morning in the wake of yesterday’s US equity sell-off. However, Asian and European equity markets reacted calm to the US equity volatility and to the headline risk regarding the US-China trade relations (Huawei). The dollar still lost slightly ground in Asia and early in Europe, but selling gradually eased. There was too little news to force a break beyond technically relevant levels especially as investors are looking forward to guidance from tomorrow’s Fed meeting. EUR/USD declined off the intraday highs and is changing hands in the 1.1430 area. USD/JPY is changing hands in the 109.40 area.

EUR/GBP and cable showed a rather erratic trading pattern as investors are looking forward to a series of key votes scheduled in the UK Parliament this evening, possibly changing course of the Brexit process. One possible outcome is that the government will be forced to ask the EU to delay Brexit to avoid a no-deal scenario. Another possible outcome might send PM May back to Brussels to renegotiate the Irish border backstop. Of late, the first scenario was seen as the most GBP-supportive. However, the exact consequences of different all scenarios still contain quite a high degree of uncertainty. This afternoon there were headlines on a Plan C of the conservative party (Malthouse compromise) that combines aspects of both amendments. Sterling lost some ground this morning, but rebounded this afternoon. EUR/GBP is changing hands in the 0.8665 area. Cable hovers in the high 1.31 area.

News Headlines

US house prices rose at the slowest pace since early 2015 in November (4.7% Y/Y), decelerating for an eight straight month according to the S&P CoreLogic Case-Shiller index. The data underscore the slowdown in the US housing market with ever-receding affordability of properties a big issue.

UK PM May is expected to endorse the “Malthouse compromise”. It’s a compromise agreement to bridge the divide in the UK Conservative party. Under this ‘Plan C’ proposal, PM May should go back to Brussels to try to renegotiate the Irish backstop. It would also include a 1 year extension of the transition period. If the attempt fails, the UK would honour its agreed financial contributions and its commitments on EU citizens’ rights, preparing for a “managed, no-deal brexit” after the extended transition period.

The Hungarian central bank kept its policy rates unchanged today (deposit rate: -0.15% and refi rate 0.9%). The governing council said the probability increased that core inflation will rise above the central bank’s 3% target. That will be the main factor determining the MNB’s policy path and not expectations about the timing of interest rate increases by the world’s leading central banks (which have shifted to an ever later date).

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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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