KBC Sunset Market Commentary 17/02/2025 via Trader Talent

KBC Sunset

Monday, February 17, 2025

Daily Market Overview

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Markets

• The hastily arranged summit in Paris by French president Macron stood in the center of attention today. Last week’s string of events, involving US president Trump, his Defense Secretary Hegseth and VP Vance, created a sense of urgency. Both the EU and Ukraine want a say in the talks for a ceasefire and as such in the post-war security architecture on the old continent at a time when the US is effectively folding the NATO-umbrella. The European buy-in at that negotiation table is to invest massively in its own defense capacity after not having done so for decades. That’s what is being discussed at the Paris summit today by a handful of European leaders, accompanied by NATO secretary-general Rutte and EC president Von der Leyen. Outgoing German minister for Foreign Affairs Baerbock at the sidelines of the sobering Munich Conference flagged an upcoming “large package that has never been seen in this dimension before. Similar to the euro or the corona crisis, there is now a financial package for security in Europe.” Details of such a package won’t be released (officially, that is) until after the German elections on Sunday though. Either way, it’s yet another existential moment where Europe risks being marginalized, economically, militarily and politically by the other great powers that be, if it does not rise to the occasion. Member States in the past have shown they are ready and willing to overcome their differences whenever circumstances were at their direst: from the GFC over the migration crisis to the pandemic and the war-related energy crunch. We can only assume they will again. That should lead to a significant boost in defense expenditures, on a national level first before moving to the European level. The Next Generation EU framework that was created in the Covid aftermath serves as the perfect blueprint. The French minister for European Affairs said such joint European bonds should be discussed in the coming days. Speculation for such increased spending is flaring up today, especially for countries that have the most room to do so, i.e. Germany. Yields rise 1.7-6.4 bps in a bear steepening move. Bunds vs swap also underperform compared to other European nations. UK yields rise 0.5-3.4 bps on a net daily basis. Prime Minister Starmer, who joined the summit, said his country needed to lift defense spending as part of the new reality they are in now. US financial markets are closed for President’s Day. The Japanese yen outperforms on currency markets after Q4 GDP numbers exceeded expectations. USD/JPY eases to 151.51. Other dollar pairs trade muted in absence of the US. EUR/USD hovers near Friday’s closing levels just south of 1.05. DXY treads water at 106.85. Sterling strengthens to EUR/GBP 0.831 ahead of tomorrow’s labour market report, Wednesday’s CPI figures and Friday’s retail sales and PMIs.

News & Views

• OPEC+ is considering delaying planned monthly oil supply increases (+120k barrels/day) set to begin in April. This would be the fourth postponement of production increases since 2022. The coalition, led by Saudi Arabia and Russia, aims to restore 2.2mn b/d by late 2026. Trump has urged OPEC to cut oil prices, but at currently $74.5/b (broadly unchanged on a daily basis), prices are still too low for many OPEC members to cover government spending. OPEC's decisions will prioritize long-term impacts with the group also concerned about the volatility caused by US trade tariffs. Even if OPEC+ maintains current output levels, global oil supplies are expected to exceed demand by 450,000 b/d this year according to the International Energy Agency.

• The International Monetary Fund (IMF) has recommended that South Africa take bold steps to reduce its debt burden and boost economic growth. The IMF suggests a fiscal adjustment of 1% of GDP per year for three years, which would help lower public debt to more prudent levels of 60% to 70% of GDP within five to ten years from a projected 74.7% at the end of FY 2025. South Africa's debt-to-GDP ratio has risen significantly, and the country faces pressure to balance fiscal discipline with demands for increased spending. Key proposed measures include wage discipline, reforms at state-owned enterprises (SOEs), and tighter control of government procurement. The South African rand trades a tad softer today, bouncing off first technical support at USD/ZAR 18.30.