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Sunset Market Commentary

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European markets took a cautious start yesterday but reflationary sentiment to some extent returned later even without guidance from the US. European yields and equities finally closed in in green. The euro didn’t decline further. Early this morning it looked that yesterday’s trends could continue. However, sentiment soon faltered. The trigger wasn’t that obvious. A few, albeit second tier EMU data, obviously didn’t help. German May factory orders declined 3.7% M/M (expected +0.9%) but are still 54.3% higher compared to the same month last year. Later in the session, German ZEW economic sentiment showed a mixed picture as the current conditions subindex jumped from -9.1 to 21.9. A the same time, expectations cooled from 79.8 to 63.3. We don’t give too much weight to the outcome of both series with especially order data being notoriously volatile. Even so, the intra-day price pattern only illustrates a fragile underlying sentiment. The German yield curve again bull flattens with yields easing between 0.1 bp and 3.5 bp (10 & 30 y). The -0.25% support for the 10-y German yield is again at risk. For now, fragile sentiment on the EMU economy/European markets at least didn’t hurt intra-EMU bond markets. If anything, 10-y intra-EMU spreads versus Germany from the likes of Greece, Italy or Spain tentatively narrowed (1 à 2 bp). US investors also started with a cautious bias as they returned from the 4th of July long weekend. The US yield curve also flattens with the 2-y little changed but the 30-y declining 5 bp. The uncertainty caused by the OPEC+ failing to reach a deal a gradually production hike also doesn’t help to give some comfort. Brent crude oil temporarily rose above $77.50 this morning but selling/profit taking kicked in as the trading proceeded. Higher oil prices due to limited supply for doesn’t support the recovery narrative. At same time, profit taking/lower prices in this context are also no vote of confidence for the reflationary narrative. European equities mostly trade with modest losses (0.25%-0.50%). US indices are switching between gains and losses. We look out whether the US non-manufacturing index brings any better news.

Fragile underlying sentiment on Europe was are very much visible in the price action of the single currency. A hesitant attempt to regain the 1.1880/90 area failed miserably. The pair currently is at risk of returning below the 1.1837 support. A similar pattern was also visible in the likes of EUR/JPY (131.05). Sterling initially also outperformed to euro, but the 0.8530 support survives (currently 0.8550). Also interesting, oil related currencies like the Norwegian krone or the Canadian dollar again don’t profit from the recent up-leg in the oil price.

News Headlines

The UK is looking at another surge in its two-trillion pound public debt pile to fulfil its pledge of carbon neutrality by 2050, the country’s Office for Budget Responsibility said in a report on future budget risks. Under a scenario of quick global action, however, the estimated debt increase of £469bn in today’s terms (or 21% of GDP) would be smaller than the addition to net debt as a result of the pandemic, it said. That could be 23% higher in case of a delayed-action scenario (taking action by 2030). If no action is taken at all, debt would surge to 289% of GDP vs. about 100% now.

US bond funds received far more net inflows than comparable equity instruments so far this year, the FT reported based on data from the Investment Company Institute. Bond mutual funds and exchange traded funds added some $372bn as of June 23. This compares to the $160bn for equities. The preference for bonds over equities comes even as the latter outperformed. Total return from govies and investment grade bonds remained negative this year, a legacy from the beating early this year amid expectations the economy and inflation would run very hot.

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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