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Sunset Market Commentary


Markets found it difficult to chose sides in today’s rather uneventful session. Economic data was scarce. New passenger car registrations in the EU declined a whopping -52.3% y/y in May. On the bright side, that’s less than the previous month, suggesting that car sales reached a trough in April (-76.3% y/y). The country breakdown showed a stunning monthly rebound in France, Italy and Spain while the recovery in Germany, the Czech Republic and Hungary was relatively limited compared to peers. The report went unnoticed anyway. European stocks were whipsawed as investors weighed lingering geopolitical uncertainty and rising coronavirus infections against continued monetary and fiscal support with the balance currently tilted to the latter. Stocks gain about 1%. Core bonds treaded water. German yields trade little changed. The 10-yr auction drew some headlines as the country raised the most out of a new benchmark bond sale in 6 years even though demand was the least since early April (1.8 bid-to-cover). Germany’s yield curve marginally bear steepens with yield rising 1 bp at the very long end (30-yr). Peripheral spreads tighten to the core. Italy (-5 bps) and Portugal (-4 bps) outperform. US yields marginally decline at the long tenors in the run-up to tonight’s US 20y bond sale.

As often lately, the US dollar traded a rather atypical pattern today. The mood is fragile though constructive and yet the greenback advances. EUR/USD trades heavy. However, intraday price developments of the common currency against other majors (yen, sterling) suggest there’s also some euro weakness at play. The currency pair is trading near this week’s lows around 1.123, down from 1.126. USD/JPY is trading clueless near 107.3. The trade-weighted dollar ekes out gains beyond 97. Sterling overcame initial weakness against the euro ahead of the Bank of England policy meeting tomorrow amid the positive risk environment. Governor Bailey will likely keep rates stable at 0.10% but is all but certain to increase the central bank’s asset purchase programme – which now amounts up to £645bn. Two governing members voted for a £100 bn increase already at the previous meeting. Today’s inflation figures at least argue in favor of such a move as the headline series slipped to a mere 0.5% y/y (0.0% m/m) in May, the lowest reading since June 2016. Core inflation (1.2% y/y) also declined to levels not seen since 2016. EUR/GBP started erasing intraday gains as soon as European dealings began, now trading at 0.894, slightly down vs. yesterday’s close at around 0.896. GBP/USD is going nowhere around 1.257.

News Headlines

The German government approved plans to issue an additional €62.5 bln in debt to finance the economic rescue package. The package would bring German net borrowing to €218.5 bln in 2020. This year’s lending is expected to bring the German debt-to-GDP ratio back up to 77% of GDP (from 60% in 2019). Still German finance minister Scholz expects the country’s debt servicing cost to decline to €9bln from 12 bln, due to lower interest rates.

Activity in the Brazilian services sector declined by 11.7% in April, the fastest decline ever. The data comes after April retail sales were reported sharply lower (-16.8% M/M) yesterday. The steep decline in activity will put further pressure on the Banco do Brasil when it decides on its policy rate later today. Markets expect the central bank to reduce the Selic target rate to a new all-time low of 2.25% from 3.0% currently.

The European Commission started public consultation preparing legislation that aims to tighten regulation that should prevent take-overs from European business by foreign state-backed entities. Several European countries are already preparing steps to protect strategic businesses from hostile take-overs by foreign entities.

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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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