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Sunset Market Commentary

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Today, global markets enjoyed a cautious risk-on trade. Over the previous days, there were already indications that the US-China trade negotiations were heading in the right direction. This view was confirmed today as China said to cut import tariffs on passenger cars from 25% to 15%. At the same time, tensions on Italy eased, at least temporary. There was no additional negative news as investors await more concrete news on which persons will hold the key Ministries in the new government. Italian assets rebounded after substantial losses on Friday and yesterday. Italian equities rebounded. The 10-year spread of Italy over Germany narrows 5 bp (currently around 180 bp). Other peripheral countries like Greece (-12 bp), Spain (-5 bp) and Portugal (-6 bp) enjoyed similar relief. German yields, which declined rather sharply over the previous two trading sessions, rose between1.5 bp and 2.5 bp (10-y). US yields rose very modestly (up to 0.5 bp). There were few eco data in the US today, but the $ 33 bln 2-year auction this evening deserves investors’ attention.

The dollar traded slightly in the defensive today returning a small part of recent gains. Improved global risk sentiment favoured some EM currencies and the euro. The euro already showed tentative signs of a short-term bottoming out process yesterday and this short squeeze continued this morning. EUR/USD jumped to touch an intraday top in the 1.1825/30 area. However, this euro rebound remains fragile. EUR/USD trades currently again in the 1.1785/90 area. The jury is still out whether the euro correction on Italy has run its course. At the same time, the dollar also looks like taking a breather after recent gains. The trade-weighted dollar trades in the 93.50 area (compared to yesterday’s peak north of 94). USD/JPY (currently just below 111) also trades off recent correction top despite a constructive risk sentiment.

Today, BoE’s Carney, Ramsden, Saunders and Vlieghe attended a hearing before the Parliament’s Treasury Committee on the May inflation report. Governor Carney defended the BoE’s communication strategy as he faced questions on the U-turn in its forward guidance on a May rate hike. Carney reiterated that the BoE’s guidance is conditional and that the indication of gradual rate hikes is very well understood by households. Regarding the current outlook on monetary policy, BoE’s Vlieghe said that he expected one or two rate hike per year over the next three years, slightly more than market currently discounts. Sterling gained temporary a few ticks after the comments of Vlieghe, but the gains could not be sustained. Aside from the BoE hearing, UK eco data were mixed. Monthly April budget data were better than expected, but CBI orders disappointed. EUR/GBP hovers in the 0.8770 area. Cable rebounded off the 1.34 area. The pair trades currently in the 1.3450 area. However, this gain is mainly due to cable following part of the EUR/USD rebound rather than outright sterling strength.

News Headlines

The China Finance Ministry said it will reduce the import duty on passenger cars from 25% to 15%. The change will be effective from July 01. The move is said to be part of a broader deal between the US and China. At least it is considered another indication of easing tensions on trade between the two countries.

Guiseppe Conte, the law professor that was put forward by the 5-star movement and the Lega as candidate for PM, was accused of being incorrect on the academic credentials in his CV. The 5SM dismissed the accusations .

The Turkish lira reached new record lows against the euro and the dollar. The move occurred as rating agency Fitch indicated to be concerned about the erosion of the independence of the country’s central 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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