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Sunset Market Commentary

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These days, it doesn’t take much for markets to move from a ‘glass-half-empty’ to ‘a glass-half-full’ mood. Financial stability issues in China, the US debt ceiling and, evidently, the potential consequences of higher energy price on the economic recovery and on global markets, they all were evident reasons for markets to turn nervous of late. At least today, these topics in one way or another turned positive or moved a bit to the background. Hong-Kong equities rebounded, US Republicans and Democrats might find common ground at least to postpone the debt-ceiling deadline well into December. Last but not least, the disruptive part of the inflation narrative also abated with European natural gas prices and oil easing off recent peak levels. The intra-price dynamics both of oil (Brent still north of $80 p/b) and gas shows that the topic might returning at any time. Still, there was room for a positive repositioning. European equities mostly gain between 1.2% and 1.8%. US indices also open with gains of 1%. (EMU) inflation expectations easing from recent peak levels caused (especially European) bonds and equities to walk the same path. German yields are declining between 0.7 bp (2-y) and 1.5 bp (10-y). Headlines/rumours that the ECB is preparing a new format to modify bond buying after the end of PEPP in March 2022 maybe added to the outperformance of European bonds. The presumption that the new framework might be selective/flexible was an additional positive for peripheral bonds. Italy outperforms with the 10-y spread versus Germany narrowing 4 bp. US yields initially hovered around yesterday’s closing levels. A faster than expected decline in weekly jobless claims (326K from 364k) helped to US yields back in green (0.6 bp for 2-y yield, 4 bp for 30-y). Markets evidently look forward to tomorrow’s US payrolls. After yesterday’s ADP report, the odds are for solid September job growth. Key question of course is whether good eco news will be considered as supporting a constructive/balanced market reaction.

Few ‘decisive’ moves in the major currency cross rates today. The DXY USD-index (94.20) held near recent peak levels, but with no real attempt top break higher. The mirror image is visible in EUR/USD. Despite a positive risk sentiment, the pair struggles to avoid further losses below the 1.1550/30 area. The yen is losing a few ticks (USD/JPY 111.50). EUR/GBP is testing the 0.85 barrier. CE currencies (EUR/CZK 25.38, EUR/HUF 358) also succeeded only modest progress. The zloty even reversed part of yesterday post-NBP gains as NBP governor Glapinski said the NBP is in a ‘longer wait-and-see mode’ after yesterday’s rate hike. EUR/PLN trades near the 4.56 handle.

News Headlines

Bank of England’s chief economist Pill said both the size and duration of the recent jump in inflation is greater than expected but stuck to the view that inflationary pressures should subside as global demand and supply normalizes. Headline and core inflation accelerated to 3.2% and 3.1% respectively. Answering questions from lawmakers, Pill said he expected interest rates to remain at “relatively low levels for the coming years”, suggesting any BoE tightening cycle won’t go very far. Markets in the meantime have pulled forward rate hike bets considerably as the energy crisis (a.o.) spurred long-term inflation expectations to the highest level in 13 years, just shy of 4%.

The European Commission will finalize measures mid next week aimed at resolving the post-Brexit trading issues in Northern Ireland by the end of this year or early 2022. Talks are then scheduled to last throughout the rest of October and November. Trade of goods from mainland UK to Northern Ireland face some difficulties since the Brexit as a result of the NI protocol that established in effect a border in the Irish Sea. London wants the protocol to be reviewed and has threatened on Monday to blow up the agreement by triggering Article 16 without a solution soon.

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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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