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Sunset Market Commentary

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Global markets showed a mixed picture at the start of the week. Asian equity mostly took a constructive start with Japan, China, Hong Kong and South Korea all recording decent to solid gains of up to 2.4%. However, European markets failed to join this positive spin. Small initial gains soon evaporated as investors pondered how long and to what extent the current new corona wave, including additional restraining measures, will hinder the gradual return to normality further down the road. Last week, the EMU PMI’s already gave a warning signal that things will most likely worsen first before turning better. Today’s German Ifo business climate strengthened that feeling. German businesses both turned less optimistic on current conditions (89.2 from 91.3) and on expectations (91.1 from 93.0). The decline was bigger than expected. Activity in the German manufacturing sector remains resilient, but confidence deteriorated in services, construction and especially in trade. Ifo expects German GDP stagnation in Q1 while economic uncertainty has grown, including due to delays in the vaccine roll-out. The poor German Ifo only accelerated the tentative risk-off bias on European markets. European equities are losing 1.0%-1.5%. US markets open mixed with Nasdaq outperforming (+1.25%) as markets are counting down to the earnings release of several tech bellwethers later this week. Core bonds already turned north before the Ifo release and this bid only accelerated. Both the German and US yields curves bull flatten, with Germany slightly outperforming. German yields decline between 1.7 bps and 3.3 bps. US yields are little changed (2-yr) to 3.1 bps lower (30-y). The US Treasury this evening starts its end of month refinancing operation with the sale of $60bn o2-yr Notes. With the Fed expected to keep rates at current levels through 2023, this sale shouldn’t unsettle markets, even not after the recent (corrective) decline in yields. Despite today’s risk-off, 10-y intra-EMU government bond spreads didn’t widen further. The post-ECB repositioning (PEPP envelope maybe won’t be exhausted) apparently has run its course. ECB’s Chief economist Lane reiterated that targeting favourable monetary conditions via a wide range of measures is the best way for the ECB to achieve its policy targets. Market for now ignore the lingering political tension in Italy as a potential factor for BTP trading (10-y spread narrows 1 bp). Oil reversed an initially attempt to gain $56/b (currently $55.5/b).

The dollar is developing a short term bottoming pattern after last week’s corrective decline. The trade-weighted USD index (DXY, 90.30) is holding north of 90.00. Some additional euro softness after the Ifo release added to this USD bid. EUR/USD dropped from the 1.2180 area to currently trade near 1.2150. EUR/GBP (0.8880 area) still showed a highly indecisive trading pattern. The test off the key 0.8865 area continues.

News Headlines

ECB board member Panetta said the ECB can help markets price climate risk better as the central bank seeks to help to protect the environment and its own balance sheet from financial risks caused by climate change. The ECB is undergoing an internal audit and debates the role of the climate in its monetary policy; stretching from the central bank’s lending programmes as well as its bond buying programme.

The Russian rouble displayed wild swings today as an early attempt to strengthen after last week’s sell-off failed miserably. Investors are dumping the rouble in the wake of Kremlin critic Navalny’s arrest and subsequent protests calling for his release. Mass detentions and hard-handed rally break ups lead to the EU considering fresh sanctions against Moscow. EUR/RUB touched 92, the highest in a month, after nearing 90 during Asian dealings.

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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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