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Sunset Market Commentary


Decent US data and headlines on the Biden government preparing for generous fiscal spending yesterday triggered an (admittedly) selective revival of the reflationary narrative. Core yields rose. At the same time, the dollar failed to profit. Today, market dynamics again turned a bit different with end-month positioning probably in play, supporting a better bid for core bonds and the dollar. Eco data were interesting, but all in all had little impact on trading. EC economic confidence accelerated from 110.5 to 114.5. Gains were broad-based, but services took the lead. Price indictors both from consumers and firms also continue trending north. Even so, the report didn’t support yesterday’s rise in (EMU) yields. Similar story for the US data. Spending and income data were close to expectations. The price deflators delivered a small beat with the core PCE deflator rising above the 3.0% mark (3.1%). Once again, the impact on US bond markets was close to non-existent. After a tentative rise earlier today, US yields currently return slightly into red territory. German Bunds slightly outperformed with yields declining up to 1.5 bp for the 5-10y sector. In an interview, ECB’s Schnabel took a more balanced view compared to some of her colleagues earlier this week. She said a rise in yields is what you expect and want to see when the economic outlook improves. At the same, time she admitted that prematurely removing policy stimulation would be a mistake. As indicated, bond investors clearly felt comfortable with this assessment. In line with moves on core bond markets, intra-EMU spreads were little changed today. The relative calm still supported modest but broad-based gains on European equity markets (on average 0.75%), with several indices including the Dax and the EuroStoxx 50 touching a new cycle top. US equities also opened in positive territory.

The dollar traded indecisive despite a potentially USD supportive narrative. Today, the USD again found its composure with the rebound in USD/JPY joined by other major cross rates. USD/JPY regained the 110 big figure (110.10). The DXY index again trades solidly north of the 90 barrier. EUR/USD, which several times tested the mid 1.22 area of late also capitulated, returning to the 1.215 area. It’s premature to draw conclusions for price action at the final day of the a month and ahead of a long US weekend. Still EUR/USD is at risk of falling out of a (rather steep) uptrend channel since the start of April. If confirmed, it might suggest the downside in the dollar is becoming better protected. Sterling yesterday outperformed as markets pondered chances for an early UK rate hike after hawkish comments for BoE’s Vlieghe. Today, the UK currency maintain its gains (against the euro), but the 0.8561 support again survives (0.8590 currently).

News Headlines

Swedish GDP grew a disappointing 0.8% q/q (0% y/y) in Q1. A slighter larger expansion of 1.1% was expected. In the plus side, growth in 2020Q4 was revised from -0.2% q/q (-2.2% y/y) to stagnation (-1.9% y/y). Growth last quarter was carried by household and government consumption. Fixed capital formation and net exports (as imports rose faster than exports) weighed on the figure. Other Swedish figures showed retail sales kicking off Q2 on softer footing (-1.4% m/m in April) after a strong March month. The Swedish krone fell from the strongest level since February at 10.08 to 10.12 EUR/SEK currently.

The Turkish lira is again exploring new record lows. EUR/TRY, now at 10.42, pierced through the previous highs of 10.30 already earlier this week. USD/TRY is currently testing the all-time low (for the lira) from November last year at 8.58. Rather than a specific trigger, markets are cautious as to whether the central bank will keep policy tight enough to curb inflation in coming months. Prices rose 17.14% in April and markets expect inflation to have accelerated further to 17.25% in May (data released on June 3th). Meanwhile, president Erdogan continues to reshuffle the central bank payroll, with deputy governor Ozbas being sacked on Tuesday and other senior staff yesterday. The moves are seen undermining the central bank’s independence and credibility.

KBC Bank
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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