Markets

The reversal in core bonds that started late on Tuesday continued yesterday. Just as there was no specific reason for the huge risk-off early this week, there was no major trigger for the moves yesterday. Some refer to better-than-expected earnings easing some of the growth fears. While it may have helped, it was probably also technical with the short squeeze/capitulation move by bond shorters perhaps coming to an end. US yields recouped 5.1 bps (5y) to 6.7 bps (10y, still sub 1.30%) with both inflation expectations and real yields rebounding. German Bunds outperformed. Yields rose 1.5 bps (10y) to 3 bps (30y). Equity sentiment also vastly improved. European stocks eked out a nice 1.78% gain (EuroStoxx50 back above 4k). Wall Street rose a little less than 1%. The dollar (and even more the Japanese yen) weakened. EUR/USD reversed earlier losses to finish higher from 1.1781 to 1.1794. Currencies that were under pressure at the start of the week, rebounded. That includes sterling which strengthened from EUR/GBP 0.8645 to just south of 0.86. The optimistic tone holds into Asian dealings where stocks are trading in positive territory everywhere in a session with little economic news. Hong Kong and India outperform. Japan is closed for the remainder of the week. Core bond futures trade a little higher after yesterday’s blow but are off highs. FX markets trade muted. The dollar is showing no clear direction.

The ECB meets today. The July reunion gained in importance after the unexpected conclusion of the strategy review. The inflation target changed to a hard 2% with over- and undershoots equally undesirable and allowed only temporarily. Hitting the new target will probably take a bit longer, thus strengthening the case for prolonged easy monetary policy. Lagarde said guidance in the statement will reflect the polished policy goals. What will be interesting however, is to what extent the new guidance/target will impact the current ECB programmes, including PEPP. The ECB President hinted at a transition of PEPP into a “new format” after its formal deadline in March 2022. By doing so, she prevents markets from anticipating an abrupt end that could cause rates to spike. It is not sure though that Lagarde will go into much details already today. Developments in PEPP, also regarding the buying pace, are usually being discussed when new staff projections are at hand. The next such meeting is in September. We’re also very curious about the ECB’s view on the July core bond surge. Yields have fallen so deep it might even make the ECB uncomfortable. The overall message in any case is likely going to be a dovish one. Question is how much is priced in already, especially given the recent declines not only in yields but also in the euro. That said, the downside alert is still here with us, even with yesterday’s reversal. For that to be called off, the German 10y yield should take out resistance around -0.34/35% first and -0.30% next. In EUR/USD we’re looking at 1.1836.

News headlines

The post-Brexit rift between the UK and the EU on the Northern Ireland Protocol continues. The UK called the EU consider a meaningful rewriting of the agreement. The UK proposals aim to reduce the controls on trade between the Britain and Northern Ireland which remained part of the EU customs union. Amongst other topics, the plan includes a system that goods labelled ‘for NI’ wouldn’t face customs checks. The UK also wants the role of the European Court of Justice in enforcing the protocol to be revised and a change Article 10 on state aid that could affect goods trade in Northern Ireland. European Commission Vice President Sefcovi already rejected the idea of a renegotiation and wants any amendment to take place within the established framework. The UK’s Brexit Minister Frost in Parliament again raised the option that the UK could unilaterally deviate from parts of the agreement. For now, the new phase in the post-Brexit sage had limited impact on sterling. In line with a broader improvement in sentiment, the UK currency yesterday rebounded with EUR/GBP returning from the 0.8650 area to close near 0.86.

Download The Full Sunrise Market Commentary        

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.

Recommended Content


Recommended Content

Editors’ Picks

AUD/USD: The hunt for 0.7000 kicks in

AUD/USD: The hunt for 0.7000 kicks in

AUD/USD finally cleared the key 0.6800 barrier, up for the fourth session in a row on the back of the persistent downward momentum in the Greenback in the wake of the Fed’s rate cut.

AUD/USD News
EUR/USD maintains its constructive tone and targets 1.1200

EUR/USD maintains its constructive tone and targets 1.1200

EUR/USD managed to add to Wednesday’s gains and climbed to the area of weekly tops around 1.1180 following further weakness in the US Dollar as investors continued to factor in the likelihood of extra rate cuts in the next few months.

EUR/USD News
Gold maintains the upward pressure near $2,600

Gold maintains the upward pressure near $2,600

Following a pullback in the early American session, Gold regains its traction and trades decisively higher on the day at around $2,580. The 10-year US Treasury bond yield retreats toward 3.7%, supporting XAU/USD in the Fed aftermath.

Gold News
XRP eyes gains as Ripple gears up for stablecoin launch, Grayscale XRP Trust notes rising NAV

XRP eyes gains as Ripple gears up for stablecoin launch, Grayscale XRP Trust notes rising NAV

Ripple (XRP) gained 2.3% since the start of the week. The altcoin’s gains are likely powered by key market movers that include Ripple USD (RUSD) stablecoin, Grayscale XRP Trust performance and the demand for the altcoin among institutional investors.

Read more
BoE expected to keep interest rate unchanged at 5% as price pressures persist

BoE expected to keep interest rate unchanged at 5% as price pressures persist

After a close call in August, the Bank of England’s September interest rate decision is keenly awaited for fresh cues on the bank’s future policy action and the pace of its bond sales.

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures