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Sunset Market Commentary


Trading developed according the standard script applying to a day with US markets closed (long weekend for 4th of July Independence Day) and only second tier eco data scheduled for release in Europe. The EMU June final services (58.3) and composite PMI’s (59.5) were upwardly revised, reaching the highest levels since July 2007 and June 2006 respectively. The release confirms the economy is gaining traction as vaccinations are rolled out further and restrictions are eased. Price pressures continue to build. However, markets currently don’t see a tight link from the data toward (monetary) policy. In fact, this was also the case after the US payrolls on Friday. Solid data as such don’t change market expectations on the timing and the pace of monetary policy normalization as at least an important part/majority of Fed and ECB members currently don’t want to take the risk of reducing policy stimulus too soon. In technical trading, German yields are rebounding modestly. The move already started before the publication of the PMI’s and remains modest compared to the flattening move at the end of last week. German yields are rising between 0.6 bp (2-y) and 2.0 bp (10 & 30-y). The German 10-y yield (-0.215%) stays below the -0.20% previous support, but next support near -0.25%/-0.28 stays safe for now. Still, the picture remains unconvincing. This also applies to the global reflationary narrative. European equities initially failed to build on Friday’s record race in the US, but gradually reverted into positive territory (gains mostly between 0.2% and 0.75%). 10-y intra-EMU spreads versus Germany are changing less than one bp. Commodities, including oil, remain well supported, but also with limited direct impact on to other (global) markets. There are no signs of progress to resolve the split in OPEC+ between Saudi Arabia and UAE. Both countries disagree on the path toward reducing production cuts. At least for now, markets apparently are confident that this won’t result in an unexpected rise in production. Brent oil ($76.40 p/b) is keeping the post-corona top within reach.

On the FX market, the dollar lost marginal ground, but no significant support levels have been challenged in major cross rates. The DXY trade-weighted index is holding well north of 92.00 (92.25). EUR/USD (1.1865) failed to regain the 1.1874/84 area (Thursday/Friday highs). USD/JPY is drifting below the 111 big figure. As was the case on Friday, sterling again outperforms the euro. The June UK services PMI was also upwardly revised to 62.4 but stayed marginally below the May post-corona top (62.9). Even so, also the broader picture for EUR/GBP (0.857) hasn’t changed. For that to happen, a break below 0.8530 is needed. We’re not that far yet.

News Headlines

Turkish inflation accelerated in June from 16.59% y/y to 17.53% (1.94% m/m), driven by another surge in food prices of 20%. But even excluding food (and energy prices), the core measure advanced from 16.99% to 17.47%. The figures make a Summer policy rate cut, floated by president Erdogan a few weeks ago, not very likely as the Turkish central bank pledged to keep real rates positive. Doing so, the CBRT hopes to curb inflation and provides some downside protection to the Turkish lira. Other, producer, price gauges still point at very strong underlying inflationary pressures as well though (42.89% y/y). EUR/TRY trades stoic near the 10.28 area.

Sweden’s parliament speaker today proposed Social Democrat leader Lofven as prime minister. A first attempt by the main opposition party leader Ulf Kristersson to form a new government after Lofven’s minority coalition collapsed last month, failed. Sweden’s Center Party said it will accept Lofven as PM and will assume a role in the opposition in return for certain reforms. The Left Party, which pulled the plug over a reform in the rental housing market, said it would vote in favour as well but rejected the demands by the Center Party. The vote, scheduled on Wednesday, thus faces many uncertainties still. EUR/SEK is trading near Friday’s closing of 10.14.

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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