French bonds enjoyed a kneejerk rally

KBC Market Research Desk KBC Bank

Markets

It’s not often that this morning report kicks off with Brazil – although it isn’t a first either. Incumbent president Lula’s surprise election victory over the weekend triggered huge market moves. Lula’s contester Bolsonaro, winner of the first round, was considered the market-friendly option with a pledge for aggressive fiscal discipline. The country’s stocks, currency and bonds had been adjusting correspondingly. Brazil’s main equity index, the Ibovespa, tanked more than 17% intraday (14% in the close). Its currency, the real, crashed 12.5% straight towards key support around USD/BRL 5.6 (from around 5) before paring losses somewhat to 10% (5.4) towards the end. Brazilian bond losses are nothing but jaw dropping: yields surged 230-250 bps (!) across the curve with intraday moves topping 300 bps in some segments. These extraordinary moves have (risk) premia written all over them and serve as a reminder of how much this topic is in play. It’s back to the drawing board for the central bank, which had been cautiously cutting policy rates from a 20-yr high of 15% to 13.75%.

The most prominent moves in the advanced section took place in OATs. French bonds enjoyed a kneejerk rally after rating agency Moody’s refrained from cutting the country’s credit rating and an all in all orderly protest weekend. Yields tumbled between 5 and 12 bps, pushing the 10-yr swapspread down by 12 bps from their recent record highs. Belgium’s swapspread fell by 6 bps in the slipstream. German yield gains varied between 4.9 and 1.3 bps, underperforming UST’s marginally (+3.5 bps at the front, -2 bps at the long end of the curve). Rising energy prices, natural gas in particular (<97€/MWh) were behind this bear flattening. Tensions on this markets eases a bit this morning on hopes for diplomacy outweighing fears for a worsening of the conflict. Saudi, Turkish and Pakistani officials have met with Iranian leaders yesterday in an effort to de-escalate, the Saudi Press Agency reported. Stock markets took a positive view with gains in the EuroStoxx50 (+0.8%) and on Wall Street (0.3-0.8%). Indices on the latter did retreat from their intraday highs and no major technical barriers were taken out so far. Tech sentiment further improves in Asian trading this morning, boosted amongst others by Anthropic’s hyped-IPO filing. The litmus test follows later this week though, with earnings by some major players including Amazon, Microsoft and Intel. The eco calendar today revolves around some US data (durable goods and Conference Board consumer confidence) and the ECB’s Bank Lending Survey. The latter is final input to Thursday’s policy meeting and will be scoured for evidence of credit supply having tightened in the wake of (French) bond market volatility. The euro remains in dire straits, unable to benefit from yesterday’s positive risk vibes. EUR/USD loses the 1.12 big figure with follow-up losses this morning keeping the YtD low of 1.1113 firmly on the radar.

News and views

South Korean GDP growth accelerated from 0.6% Q/Q to 1%, outpacing consensus expectations of a 0.8% quarterly rhythm. Compared with Q3 of last year, the economy grew by 3.4% (from 3.7% in Q2 and vs 3.1% consensus). A supply-side breakdown showed growth across all sectors though lobsided towards manufacturing (2% Q/Q & 7% Y/Y; driven by computer, electronic & optical products and machinery & equipment) and construction (2% Q/Q & -1.4% Y/Y) while services sector growth slowed to 0.2% Q/Q (2.4% Y/Y). Details on the expenditure side also showed the impact from the AI-boom with export growth rising to 2.4% Q/Q (8.6% Y/Y). The net contribution to GDP growth was modest due to imports increasing by 2.4% Q/Q (7% Y/Y). Private consumption was weak at -0.2% Q/Q, but government consumption rose by 1.9% Q/Q to lift combined consumption to 0.3% Q/Q (1.5% Y/Y). Gross fixed capital formation was again a strong growth driver at 2.2% Q/Q (4.3% Y/Y). The Bank of Korea already raised its policy rate twice this year (from 2.5% to 3%) with today’s GDP print adding to the tightening case given sticky above-target inflation. The Korean won holds near strongest levels against the US dollar this morning since October 2024 (USD/KRW 1325).

The British Retail Consortium’s shop price monitor showed overall shopping prices rising by 0.4% M/M in October with the Y/Y-figure accelerating from 1.4% to 2.9%, the fastest pace since February 2024. Details showed food prices unchanged in October (+2.9% Y/Y from +2.5%) while non-food costs accelerated to 0.7% M/M (+1.7% Y/Y from +0.8%; almost 3-yr high). BRC CEO Dickinson warned that the dam is starting to break on the huge wave of costs retailers have absorbed over the last two years. Retailers cited higher energy costs, transport costs, employment costs and packaging levies as factors pushing prices higher. Today’s data add to the November BoE rate hike case.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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