Sunrise Market Commentary

Markets

• EUR/USD sinks below 1.12 this morning for the first time since May 2025. A hawkish Fed started the EUR/USD decline from 1.16+ mid-September. Euro weakness took over from dollar strength last week and forced a technical break on the downside of the sideways EUR/USD trading range in place since the summer of 2025. Friday’s disappointing US payrolls report (+29k vs +90k consensus) didn’t really hold back the greenback. The French 10-yr OAT swap spread went from 80 bps at the end of August to a new all-time high above 140 bps last week. On a closing-level basis, the difference rose by 26 bps last week. From Thursday on, there was clear contagion towards the likes of Belgium or Italy, while Germany and the Netherlands profited from safe haven flows. Investors fret about last week’s draft budget proposal which implies at least another year with a 5% budget deficit. The efforts from the current 5.4% of GDP shortfall are deemed too little and too late, with the upcoming presidential elections numbing political will further in the minority government and fragmented political landscape. Frontrunning RN is also still to set out its future plans on deficit reduction should it claim victory next spring. On EMU money markets, investors dialed down on ECB tightening bets because of the echo to the EMU debt crisis over a decade ago. The EU 2-yr swap rate corrected some 20 bps lower last week. The biggest fear is the negative feedback loop to the financial sector which could ultimately and worst-case result in a growth-slowing credit crunch. This economic risk hangs in the balance with accelerating European inflation and stubbornly high energy prices (Brent > $100/b; Dutch TTF >€75/MWh). September EMU CPI printed Friday at 0.6% M/M and 3.8% Y/Y (up from 3.2% and against 3.7% consensus). Even more worrying was the 0.5% M/M acceleration in services inflation which pushed the Y/Y-number back up to 3.2% from 3%. Spanish statistics suggest that package holiday prices were among the drivers of the upside surprise. Our in-house KBC Nowcast model points to a first 4%(+) reading since September 2023 for headline CPI in October. Core CPI is seen sticky at 2.4% Y/Y.
• EMU sovereign spreads and French political risk remain the key market themes at the start of trading. Next technical support in EUR/USD stands at 1.1111/1.1087 (50% retracement on 2025-26 rally; May2025 low). EUR/GBP is close to a test of the YtD low at 0.8455. The Swiss franc returns in the sweet spot with EUR/CHF trading below 0.93 for the first time since the end of July. The ECB’s annual conference on monetary policy (“Bridging science and practice”) starts today and will generate a lot of headlines. The keynote speech is from chief economist Lane. ECB President Lagarde last week in front of European parliament mentioned the tightening impact from higher long term rates, implying less work to be done by the central bank in its inflation battle. It might be too soon for comments on the French situation. The US services ISM is set to showcase more US economic strength.

News & Views

• The Brazilian presidential elections are headed towards a run-off on October 25. Bolsonaro (junior) defied the majority of polls, which favoured incumbent president Lula. The rightwing contender secured 47% of the vote compared to leftist Lula’s 45%. With neither candidate getting 50% or more of the vote, a run-off will take place. Since most of the other candidates in yesterday’s first round come from rightist parties, Bolsonaro is expected to secure the presidency. He’s considered the most market-friendly pick and expectations are for the Brazilian currency and bonds to do well at the open later today. Bolsonaro promised a “big cut” in spending, although he hasn’t detailed yet how. Lula on the other hand unleashed several stimulus measures, including a boost to social welfare benefits and plans to use public funds to buy delinquent debts in the weeks prior to the election.
• Several people close to the Spanish prime minister Sánchez said cabinet ministers and other high-ranking government officials are considering early elections. Sánchez spent the weekend with senior figures and could decide on the matter as soon as today. Spain’s minority government had been struggling to pass legislation ever since taking office in 2023. But the cabinet really entered crisis mode after two emergency housing bills were defeated in parliament on Friday. Affordable housing has become a politically sensitive subject and is a core issue for the Socialist Party’s supporter base. The major setbacks come on top of multiplying corruption cases and after the Ceuta incident over the summer, which fueled another wave of social discontent. Next Spanish general elections were already planned next year. They should be held no later than 22 August 2027.