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Sunset Market Commentary

Markets:

Global core bonds started on a weak footing this morning. US Treasuries had some catching up to do following yesterday’s President’s Day Holiday, but the Bund lost ground as well. Higher-than-expected German PPI data were probably to blame. The intraday downside was rapidly exhausted with core bond markets returning to opening levels by European noon despite a stronger German ZEW (expectations component). The corrective move higher continued during US trading. US Treasuries underperformed German Bunds. The start of this week’s heavy US supply operation (2-yr Note auction tonight) plays a role. The auctions draw attention against a background of an uptrend in yields and a projected increase in the US’s twin deficit. Last time around, demand was smaller than usual, weighing additionally on US Treasuries. The US yield curve bear flattens at the time of writing with yields 2.9 bps (2-yr) to 1 bp (30-yr) higher. German yields decline around 1.5 bps across the curve. 10-yr yield spread changes vs Germany are nearly unchanged with Greece underperforming (+11 bps) . Spain successfully launched a new 30-yr benchmark today (€6 bn Oct2048). The orderbook closed above €25bn. The bond was prices to yield MS+105 bps, tighter than MS +109 bps guidance.

The dollar extended the gradual rebound that started at the end of last week. We didn’t saw much high profile news behind the move. German ZEW economic sentiment was better than expected, but didn’t help the euro. European equities outperformed US equity futures. On the other hand, interest rate differentials moved slightly in favour of the dollar as Bunds outperformed Treasuries. Admittedly, these factors were often ignored of late. So technical considerations probably remained an important driver. EUR/USD declined further in the 1.23 big figure, creating some breathing space vis-à-vis the key 1.2555/98 resistance area. The pair trades currently in the 1.2350 area. USD/JPY hovers in the low 107 area. So, the dollar staged a cautious comeback, but still didn’t regain any important technical level yet, especially not in the EUR/USD cross rate. The focus on global (FX) markets now turns to the US Treasury auctions starting this evening.

The news flow on Brexit remained mixed. The bickering between the EU and the UK on potential measures and negative consequences in case of no Brexit deal continued. On the other hand, the EU Parliament was said to prepare a text that calls for flexibility in the EU-UK Brexit talks. In a ‘road to Brexit speech’, UK Brexit secretary Davis also advocated an approach of mutual recognition of rules that should ensure both parties to maintain access to each other’s’ markets. He also dismissed ‘rumours’ that the UK would intend to undercut EU regulation to improve its competitive position. For sterling traders, the positive news outweighed the negative headlines. After the rejected test of the 0.8930 area last week, EUR/GBP declined further in the 0.88 big figure. CBI order data were softer than expected, but had only a temporary impact on sterling. The decline of EUR/USD was also a slightly negative for EUR/GBP. The pair trades currently in the 0.8825 area. Cable resisted the USD rebound quite well and holds in the 1.40 area.

News Headlines:

The German economy is expected to improve in the next six months despite a slight deterioration in current investor morale in February, according to the ZEW-survey. German producer prices rose more than expected in January (0.5% M/M & 2.1% Y/Y).

Business insider reports that the European Parliament is pushing for a future relationship with the United Kingdom which could allow for Britain to retain "privileged" access to the single market. That’s a break from the position of the chief EU negotiator Barnier.

If planned US import restrictions on steel and aluminium affect European companies, the EU could react in days with counter-tariffs on major US products ranging from orange juice to motorcycles and whiskey, Frankfurter Allgemeine Zeitung reports, citing unidentified EU Commission officials

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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