Attention is focused on Friday’s release of the PMI business confidence indicators
Markets
The violent protests in France last weekend left their mark on financial markets. The premium that France has to pay on top of the 10-year swap rate widened to 137 basis points, more than 10 bps higher than Friday’s close and the highest level since the creation of the euro area. The Belgian 10y OLO-swapspread closed above 80 bps (+7 bps), a new 14-year high. European equity markets, and not only France’s, fell by 1% to 1.5%, diverging from the technology- driven US markets, which gained up to 1%. In this context, the damage to the euro could have been greater. EUR/USD tested but ultimately held above 1.12. In other major markets, energy prices keep pushing higher with Brent crude piercing through $110b this morning, while natural gas hovers around, but just below, €90/MWh. US interest rates gained most of their momentum during the American trading session and ended the day 4.5 to more than 7 bps higher. European yields rose by 1 to 3 bps. Today’s economic calendar once again offers little inspiration. For now, attention is focused on Friday’s release of the PMI business confidence indicators. Energy and France remain the dominant themes and, through overall risk sentiment, continue to set the tone for the euro and other markets. Over the past few days, EUR/USD has shown signs of forming a bottom, but there is probably not much more upside than that.
The test of EUR/GBP 0.84 during yesterday’s less liquid Asian trading session has, for the time being, remained without consequence. Nevertheless, the pair closed lower at around 0.842. On balance, the path of least resistance still appears to be downward. A strong UK labour market report is supporting that move this morning. The unemployment rate unexpectedly declined to 4.7% in August, while employment growth significantly exceeded expectations. A first indication for September also points to job growth, rather than the job losses that consensus forecasts had predicted.
News and views
China’s central bank will study a switch to the overnight reverse repurchase rate as the new main policy benchmark, governor Pan Gongsheng said in Beijing, as per the Financial News newspaper. Such a move would replace the current seven-day reverse repo rate and align the PBOC closer to standard practices of global peers. The O/N rate was first introduced in June with the rate set at 1.25%, below the 1.4% of the seven-day version with growing frequency and volumes in operations through September. The PBOC in mid-2024 announced it would move away from the one-year MLF as the key policy signal in favor of the seven-day rate. China’s yuan appreciates to fresh multiyear highs to USD/CNY 6.68.
Japan is asking the US to push China into easing its rare earth export controls to avoid a manufacturing shutdown. The country said it is mere months away from running out of supplies of a critical metal called yttrium, a heat- resistant element used in the manufacture of vehicles, jet engines, and semiconductors. The US is involved through its dependence of the defense supply chains on Japanese made components that contain yttrium. China dominates the mining and processing of rare earths and has been using it as geopolitical leverage, amongst others in Japan (over PM Takaichi’s Taiwan-related comments last year) and the US (in trade talks). The price of the metal is a mere $9 per kg in China but soared to $1150 per kg elsewhere, the Financial Times reported based on Argus price assessments.
Author
KBC Market Research Desk
KBC Bank
KBC's Market Research Desk publishes a number of short-term reports.
