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Sunset Market Commentary

Markets:

Global core bonds corrected higher today following last week’s sell-off. The move occurred amid a rather thin EMU eco calendar. Both the German Bund and US Note future were well into oversold territory. US politics might be at play with Democrats warning for a constitutional crisis over a top-secret memo which President Trump could use to fire his deputy attorney-general. German yields decline by 1.5 bps (2-yr) to 4.1 bps (5-yr) at the time of writing. The technical chart of the German 10-yr yield could show an engulfing pattern if we close today below Friday’s intraday low (0.726%). That would suggest a slowdown in the Bund sell-off with even some additional correction higher. The US yield curve steepens with yield changes ranging between -1.5 bps (2-yr) +1.4 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany are limited with Portugal (+4 bps) and Greece (+11 bps) underperforming.

The dollar remains a place of relative calm given the nervous developments on other markets. EUR/USD held a relatively tight sideways range in the 1.24 big figure. EMU PMI’s were very strong, but had only a very limited, temporary impact on EUR/USD. LT interest rate differentials widened slightly in favour of the dollar as Bunds outperformed Treasuries. However this was only a secondary factor for EUR/USD trading, at best. EUR/USD came under some modest pressure at the start of the US trading session (currently 1.2415 area). Still, the risk-off correction has only a modest impact on EUR/USD trading. Sentiment in USD/JPY is changing slightly. The yen ignored the equity sell-off at the end of last week as higher core yields and an ongoing soft approach from the BoJ weighed on the yen. Today’s risk-off sentiment helped the yen to rebound off the post-payrolls’ correction low. USD/JPY is drifting back below 110 (currently 109.80). EUR/JPY also eased after last week’s spike and returned to mid-136 area. That said, the yen is still far away from playing the save haven role as it did in the past.

The sterling correction accelerated today. EUR/GBP held north of 0.88 at the start of trading. The UK currency continued to suffer from negative Brexit headlines (UK government wants to stay out of custom union after Brexit) and from a further deterioration in global risk sentiment. Mid-morning, sterling faced an additional headwind as the UK services PMI declined unexpectedly to 53 to 54.2, indicating a material slowdown in UK activity at the start of 2018. The data ease pressure on the BoE to considered a next rate in the near future. EUR/GBP rallied to fill offers in the 0.8870 area. 0.8928 intermediate resistance is coming on the horizon. Cable trades in the 1.4020 area as the dollar decline slowed, too.

News Headlines:

The US Non-manufacturing beat expectations, rising from 56 to 59.9, the highest level since 2005.

Britain’s economy slowed sharply in January. The slowdown was driven mostly by Britain’s services sector. The services PMI fell to a 16-month low of 53.0 from54.2 in December. The composite index eased from 54.9 to 53.5.

Contrary to the UK data, the EMU PMI’s continued to signal a strong momentum in the EMU economy at the start of the year. The January services PMI was upwardly revised from 57.6 to 58.0. The composite measure rose to 58.8. The PMI’s point to a Q1 GDP growth of 1.0% according to IHS Markit.

Negotiators for Chancellor Merkel’s conservatives and the centre-left Social Democrats (SPD) reconvened to hammer out compromises on healthcare and labour policy, the stumbling blocks in the way of another "grand coalition". Both sides cited progress and said the remaining differences did not appear insurmountable.

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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