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Sunset Market Commentary

Markets:

Global core bonds lost marginally ground today with easing geopolitical tensions still at play. Interestingly, the US yield curve bear flattens (+1.6 bps for 2-yr and flat for 30-yr) while the German one bear steepens (flat for 2-yr and +1.3 bps for 30-yr). The widening of the short term US/GE spread accelerated this week following the mix of hawkish FOMC Minutes and dovish ECB Minutes. The spread reaches a new multiyear high of 294 bps. The US 2-yr yield set a cycle high at 2.37%. Boston Fed Rosengren, a hawk in favour of more rate hikes this year than the current median (2), warned of the risk of overheating and slightly added to the move. EUR/USD held remarkably strong around 1.2330 throughout the session despite this mix of strong equities and a rising spread differential. The dollar did gain the upper hand against the yen, overtaking first intermediate resistance (107.49) and heading towards strong technical resistance at 108.28/43 (previous low/38% retracement).

Sterling took a strong start to trading with GBP/USD attacking 1.43 and EUR/GBP dropping below 0.8650. However, the UK currency couldn’t hold on to those positive vibes and the rally gradually choked. The test of key EUR/GBP 0.87/0.8650 support remains ongoing though. We hold this morning’s line that a break will be difficult ahead of next week’s events. The EU and UK will for the first time look into the post-brexit trade relationship. The negotiations will also cover the unresolved issue of the Irish border and other parts of the divorce agreement that remain to be settled. It could break sterling’s momentum given that both parties’ official views remain wide apart. The UK labour market report, CPI and retail sales are also on the agenda next week.

News Headlines:

OPEC and its allies appear to have accomplished their mission of bringing global oil stocks to desired levels, the International Energy Agency said, signaling that the markets could become too tight if supply remains restrained. Brent crude hovers around $72/barrel as geopolitical concerns keep oil prices underpinned.

S&P raised the outlook from the Japanese A+ rating to positive from stable. The rating agency expects Japan’s relative debt burden to stabilize sooner than previously anticipated due to negative effective real interest rates and the country’s nominal economic growth exceeding 2%, according to the statement. Japan is rated at a similar level at Moody’s (A1, stable) and one notch weaker at Fitch (A, stable).

Headline earnings (EPS) topped expectations for JP Morgan, Wells Fargo and Citi who kicked off the real Q1 earnings season. JP Morgan’s quarterly profit fell short of expectations though as lower revenue from investment banking ate into gains from US corporate tax changes and higher interest rates. Wells Fargo’s earnings were subject to change as a $1bn penalty over mis-sold car insurance and mortgage fees looms.

Italian President Mattarella said he will decide how to break the political deadlock in a few days’ time, after a second round of talks with party leaders failed to make progress in the search for a new government.

• Turkish President Erdogan’s senior advisor Ertem told local media that they are able to quickly defeat exchange rate volatility, hinting at interventions. EUR/TRY decline from 5.08 to 5.03 after hitting an all-time high earlier this week following the launch of a new economic incentive plan which is rumoured to be complemented by lower interest rates. That’s a rather bizarre policy week given the country’s already strong growth and double digit inflation.

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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