Tue, Mar 21, 2023 @ 02:08 GMT
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Sunset Market Commentary


Global core bond trading remained lackluster today, with both the Bund and US Note future trading with a slight intraday downward bias. The move accelerates as US trading kicks in. Investors keep fate that US President Trump won’t blow up the Iranian nuclear accord (JCPOA) tonight. Heavy supply could be partially at play as well. Fed Chair Powell stressed the importance of flagging policy actions to markets, but made no suggestions of stepping up the tightening cycle. The German yield curve steepens at the time of writing with yield changes ranging between -0.4 bps (2-yr) and +2.7 bps (30-yr). US yields add 1.2 bps (30-yr) to 2.2 bps (5-yr) with the belly of the curve underperforming the wings. Italian assets underperformed as 5SM leader Di Maio and Lega Nord leader Salvini buried a last-ditch effort by Italian president Mattarella to form a government of national unity to solve the political deadlock. Both party leaders are in favour of July elections, boosted by favorable election polls. The prospect of a populist tandem 5SM-Lega Nord weighs on Italian bonds and stocks. The Italian 10-yr spread adds 7 bps, but there is no spill-over to other peripheral bonds markets. The Bund didn’t profit from safe haven flows.

Relative USD strength persisted. The US currency retained the benefit of the doubt as investors pondered the potential impact of president Trump’s decision on the Iranian nuclear deal. Technical considerations were also in play. EUR/USD dropped below the 1.1936 62 % retracement level, confirming the negative momentum in this cross rate. The euro faced additional selling during the day on headlines that Italy was heading for new Parliamentary elections. EUR/USD declined further below the 1.19 handle. A correction in the oil price also supported the dollar. EUR/USD trades currently in the 1.1850/55 area. As was the case over the previous days, USD/JPY underperformed the overall USD rally. The pair hovers in the low 109 area. EUR/JPY (currently around 129.50) is nearing the key 129 support area. A break of this level could trigger further stop-loss selling in other euro cross rates.

Sterling trading was driven by a sequence of conflicting factors today. In the end, the UK currency trades marginally stronger against a weak euro, but loses ground against the dollar. The UK currency profited temporary from the announcement of a big corporate take-over deal this morning. However, the positive impact on sterling was limited and short-lived. Much weaker than expected Halifax house Prices (-3.1% M/M vs only -0.2% expected) wrong-footed sterling longs. The report raised further doubts on the health of the UK economy. More negative headlines from the housing markets might be a reason for the BoE to keep a cautious approach. EUR/GBP jumped to the 0.8810 area. Later in the session, overall euro weakness also reversed this EUR/GBP up-tick. EUR/GBP trades currently again in the 0.8785 area. Cable dropped to the 1.35 area mirroring, both sterling softness and USD strength.

News Headlines:

US NFIB small business optimism improved slightly in April, from 104.7 to 104.8, beating 104.5 consensus. The indicator remains at historically high levels. Consumer spending, the new tax law and lower regulatory barriers are all supporting the surge in optimism across all small business industry sectors.

A stronger-than-expected rebound in German industrial output in March (1% M/M vs 0.8% M/M forecast), and a jump in exports in the same month (1.7% M/M), helped ease concerns that growth in Europe’s biggest economy could have come to a standstill at the start of the year. Imports disappointed though, declining by 0.9% M/M. (Reuters)

Federal Reserve Chairman Powell said the central bank would communicate its interest-rate policy strategy “as clearly and transparently as possible” to avoid market turmoil that could ripple through foreign economies. (WSJ)

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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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