Tue, Dec 01, 2020 @ 02:57 GMT
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Sunset Market Commentary

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Stock markets shed 1% (US) to 2% (Europe) currently against a deteriorating Corona-background at both sides of the Atlantic. German IFO business sentiment printed near consensus, confirming the German outperformance witnessed in last week’s PMI’s, but didn’t shift trading dynamics. It was all about risk sentiment today given the backloaded eco/event calendar and looming US elections. German Bunds traded extremely and inexplicably weak in the risk off environment, underperforming US Treasuries. German yields add up to 2 bps with the belly of the curve underperforming the wings. The US yield curve bull flattens with yields shedding 0.6 bps (2-yr) to 3.6 bps (30-yr). The US 10-yr yield is testing previous resistance at 0.80%. The dollar takes the upper hand at the FX market with EUR/USD sliding to the low 1.18 area and USD/JPY even slightly rising towards 105. Sterling underperforms other majors in the current risk climate with EUR/GBP back in the high 0.90-zone. Brent crude falls to $40.50/barrel.

The ECB is expected to keep its monetary policy unchanged later this week. The Governing Council meets against the background of rising economic woes (October PMI’s point at double dip recession) which further depress an already bleak inflation outlook. Headline inflation ran in negative territory for two consecutive months with core inflation at an EMU record low. Consensus expects more of the same in the October release on Friday. The second European Covid-19 infection wave is even more severe than the first one and triggers fresh semi-lockdown measures. ECB Panetta already warned that the central bank’s prediction of a return to pre-COVID GDP levels by the end of 2022 is at risk. The ECB’s problem is that external (market) pressure to deliver additional monetary support (in December) remains huge even if it admits that fiscal stimulus should be the first line of response to shield the economy. We therefore continue to deem it unlikely that the ECB will cut its deposit rate further even as the 3-month forward Euribor curve discounts a small cut in 2021. Cutting interest rates against euro strength is even less likely at the current exchange rate. Several ECB members stepped up verbal interventions around EUR/USD 1.20 earlier this year, but soon learnt that markets don’t buy the threat. The ECB’s other possibility centers around asset purchases. The second Coviod-wave warrants an extension from the emergency purchases (PEPP) beyond the currently eyed mid-2021. Simultaneously, the ECB could raise the amount of the envelope even if more than half of the targeted €1350bn still needs to be spend.

News Headlines

The German government will revise upwards its growth forecast for this year, a source familiar with the matter said. The updated projections due this Wednesday will reveal a growth decline of 5.5% this year compared to -5.8% previously, followed by a 4.4% (unchanged) the year after. This is despite the resurgence of the coronavirus that forces a second German district into lockdown again, starting tomorrow.

Turkish president Erdogan calls for a boycott of French goods as he increases criticism of French president Macron over his attitude towards Muslims in the wake of the terror attack almost two weeks ago. The Turkish lira gets whacked amid rising geopolitical tensions (with France but also Greece, the US and Russia in the Armenian-Azeri conflict), overall risk-off and a central bank with hands tied. USD/TRY surpasses 8(.09) for the first time. EUR/TRY (9.56) reaches a new all-time high in lockstep.

The European Securities and Markets Authority announced it would exempt EU shares trading on a UK exchange from the share trading obligation rule. Doing so allows EU investors to still be able to trade dual-listed companies in London. The decision comes after European businesses voiced concerns of being cut out the deep capital pools in the UK after Brexit.

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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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