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Sunset Market Commentary


There’s no stopping the ruling EUR/USD trend south. Especially if eco data surprise on the downside in Europe and on the upside in the US. November German Ifo business sentiment (96.5 from 97.7) disconnected from yesterday’s stronger PMI’s. Both the current assessment and expectations component declined; the latter to the lowest level since January. Ifo president Fuest referred to continuous problems from (supply) bottlenecks and on top of that fresh, very serious, Covid outbreaks. Services and services expectations are falling very quickly, in particular in hospitality and tourism. The US eco calendar showed weekly jobless claims crashing below 200k (199k from 268k vs 260k expected) for the first time since the series started 1969. The drop can partly be explained (and reversed next week) by seasonal factors around Veteran’s Day and Thanksgiving Day holidays. Simultaneously, the October trade deficit was much smaller than forecast and than in October ($82.9bn from $97bn vs $95bn expected). Exports rose by 10.7% on a monthly basis while imports increased by a much smaller 0.5% M/M. Trade data provide a positive start for net exports in Q4 GDP. Later today, October PCE deflators and income/spending data will still be released. Inflation is expected to run ever hotter in line with the earlier CPI print. The combination of today’s eco numbers pushed EUR/USD below the 1.12 handle for the first time since June last year. Next minor support comes in at 1.1168. EUR/GBP tested the recent lows just south of 0.84, but a break lower didn’t occur. Adding to general US strength today were comments from SF Fed Daly who joined the chorus of Fed governors (Bullard, Clarida, Waller) in favor of an accelerated taper process in order to free space on the interest rate channel. Eco indicators so far point to a stronger Q4 GDP while the labour market seems tighter than forecast and inflation is running hotter than the September SEP suggested. The trade-weighted dollar has the 97 big figure within reach. Key resistance stands at 97.72 which is 62% retracement on the 2020 USD decline. USD/JPY left the 115-zone behind and nears the 115.51 resistance. From a technical point of view, the next target stands at the 2017 high of 118.60. The US Treasury yield curve bear flattens again with yields rising by 2.2 bps to 2.5 bps at the front end and only by 0.3 bps to 0.5 bps at the (very) long end. The US 10y yield approaches the September top at 1.7% with the US 2-yr yield setting a cycle high at 0.65%. The German yield curve steeps with yield changes ranging between -1.2 bps (2-yr) and +3.8 bps (30-yr). 10-yr yield spread changes vs Germany widen by up to 5 bps for Greece and 3 bps for Italy as German real yields are the driving factor between higher European rates for a second straight session.

News Headlines

ECB Governing Council member Holzmann said the central bank could put PEPP on hold rather than to completely abolish after net purchases end in March next year. Such a move would “save the advantages of flexibility in case they become necessary in the event of economic shocks”, he added. His comments came after Schnabel yesterday also suggested that PEPP would continue to play a role even after deciding to stop net buying next year. The Austrian played down the impact of his home country’s total lockdown on the economy, siding with other governors that recently said the same about possible tighter restrictions for the European Union as a whole.

Olaf Scholz is set to become Germany’s next chancellor. After almost two months of negotiating, Scholz’ SPD, the liberal FDP and the Greens forged a so-called traffic light coalition – the first of its kind on a national level. The FDP’s Lindner, an advocate of fiscal discipline, is touted for the all-important position as finance minister. According to the coalition deal’s text, Germany will re-introduce the debt brake in 2023 but will tweak the rules since spending will increase dramatically in order to achieve its climate goals. On a related note, it will expand green bond sales. The coalition agreement did not mention the Bundesbank nor dropped any hints on Weidmann’s successor.

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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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