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Sunset Market Commentary

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Over the previous days, global markets mostly ignored headlines on a sharp rise of new corona infections, in the first place in the America’s but to a lesser extent also in the some European countries. Asian equities still showed quite resilient, but Europe finally couldn’t withstand the flood. Selling accelerated soon after start of cash trading and gradually slowed around noon. Rising trade tensions including the threat of the US and Europe imposing mutual trade tariffs linked the dispute on government subsidies for the aircraft sector maybe added to the negative sentiment. European equities are losing up to 1.75%. In line with the PMI’s yesterday, German IFO business confidence printed stronger than expected. However, contrary to what was the case yesterday, the ‘good news’ this time didn’t help to support investor confidence. Joining the correction from Europe, US equities open with losses of about 1%. This afternoon, the IMF further downgraded its forecast for the global economy, predicting a contraction of 4.9% this year (was 3% in April). However, the risk-off correction wasn’t equally spread across other parts of the markets. Core bonds initially gained a few ticks on the global risk-off repositioning, but this time there was no strong safe haven run on Bunds or Treasuries. Both US and German yields trade little changed. Interestingly, peripheral EMU bonds also withstood the corona-inspired global risk off. 10-y spreads in the likes of Spain and Italy are little changed in a daily perspective. In a speech, ECB’s Lane in extenso elaborated on the impact of several aspects of the ECB’s newly established post-corona policy framework. Regarding the economic context, the ECB Chief economist warned that the scale of the initial rebound as it appears in current data is no good guide to the speed and robustness of the recovery. Lane also advocated the importance of the approval of the €750 bln EU rescue package. With respect to monetary policy in indicated that asset purchases remain the more effective tool in the current environment rather than further rate cuts.

The pact of the risk-off repositioning on global FX trading was also a bit diffuse. The trade-weighted dollar rebounds and is nearing the 97 big figure. EUR/USD fell prey to profit taking after solid gains earlier this week. The pair currently trades in the 1.1265 area compared after trading in the 1.1320 area this morning. The yen still isn’t able to fulfill its task of safe haven refuge. The dollar again outperforms the yen with USD/JPY trading in the 106.75 area. Sterling recently underperformed the euro with EUR/GBP tending higher in the 0.90 big figure. However, the UK currency was in relatively better shape today and didn’t suffer further losses despite the risk-off. EUR/GBP entered calmer waters trading in the 0.9030 area.

News Headlines

The Czech National Bank kept its policy rate stable at 0.25% today after three consecutive rate cuts in as many months. The CNB is likely to await incoming data as the Czech Republic lifted restrictions almost completely by now. At the May meeting, the CNB projected growth to decline 8% this year followed by a 4% rebound in the next with inflation reaching target within the policy horizon whilst keeping rates unchanged at the current level.

Austria auctioned its second ever century bond today. The centennial drew a record demand of €16 bn from which it raised €2 bn in return for a ‘mere’ yet positive yield of 0.88%. The initial guidance stood at 0.95%. The country’s first century bond yielded 2.1% in 2017 and has rallied that much it offers a total return of about 85% today.

South Africa’s 2020-21 deficit will widen to 15.7%, a special budget showed today, almost double the 6.8% projected in February. The economy is expected to contract 7.2% this year before recovering 2.6% and 1.5% in the consecutive years. Debt levels will rise to 81.8% in 2020-21 and peak at 87.4% in 2023-24.

KBC Bank
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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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