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Sunset Market Commentary

Markets:

The German Bund and US Note future traded volatile today, but are currently near opening levels. The short squeeze triggered by yesterday’s huge sell-off on (US) stock markets didn’t gain traction. Both markets are trying to reach a new short term equilibrium. European equities opened significantly lower, but didn’t suffer additional losses. US stock markets opened with small losses. The eco calendar was empty apart from a bigger-than-expected US trade deficit which didn’t impact trading. US yields add 4.5 bps (2-yr) to 6.7 bps (10-yr) at the time of writing. The US 10-yr yield retested the previous range top at 2.63%/2.64%, but rebounded higher. The German yield curve bull flattens with yields 0.2 bps (2-yr) to 3.1 bps (30-yr) lower. 10-yr yield spread changes versus Germany are nearly unchanged with Greece and Portugal underperforming (+7 bps). Greece held off launching a new 7-yr deal, probably because of increased market volatility.

The dollar still showed a diffuse picture this morning. EUR/USD tried to rebound after yesterday’s correction during the equity sell-off. Strong German order data were a minor positive. More important, European equities opened with substantial losses, but the decline (about 2.5%/3.0% soon after the open) was not excessive given the price moves yesterday evening. This was also slightly euro supportive. EUR/USD filled offers in the 1.2430 area. At the same time, USD/JPY remained well bid. The pair held a tight range close to most slightly north of 109. The yen again didn’t profit from the rise in global volatility as Japanese official reiterated their commitment to keep an easy monetary policy. Around noon, the dollar received a better bid across the board. Interest rate differentials widened slightly in favour of the dollar. Technical considerations were also in play. The US trade deficit was bigger than expected, but largely ignored. EUR/USD tested first intermediate support at 1.2323/35, but no break occurred (yet). A break would ease the upside pressure. USD/JPY is trending cautiously higher in the 109 big figure.

In nervous trade, EUR/GBP jumped up and down in the upper half of the 0.88 big figure and currently tries to clear the 0.89 mark. There was little ‘new’ news for sterling traders. With the Brexit procedure, one never knows, but recent comments from UK politicians suggest that a soft Brexit is becoming unlikely. This factor remains a negative for the UK currency. The 0.8928 intermediate resistance is coming with reach. The decline in cable is reinforced by a cautious comeback of the dollar. The pair dropped well below the 1.39 big figure. There are only second tier eco data in the UK tomorrow. Markets are counting down to Thursday’s BoE meeting. Will Carney and Co keep the door open for the rate hike later this year even as chances on a hard Brexit are growing? This week’s PMIs weren’t really reassuring on the prospects for the UK economy in the short-to-medium term.

News Headlines:

German industrial orders surged a stronger than expected 3.8% in January, supporting expectations that Europe’s largest economy is on track for a good start of 2018 after expanding by 2.2% in 2017. Export orders, especially orders from the rest to the euro zone were an important factor behind to strong order data.

The US trade deficit widened more than expected in December to $53.1bn, hitting its highest level since 2008. Robust domestic demand pushed imports to a record high. Part of the rise in the trade gap reflected commodity price increases. The deficit surged to $566.0 bn in 2017, the highest since 2008. The politically sensitive US-China trade deficit increased 8.1% to a record $375.2 billion last year.

A Scottish court rejected a legal attempt to ask the European Court of Justice (ECJ) to clarify whether Britain could unilaterally stop the Brexit process

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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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