KBC Sunset Market Commentary 24/02/2025 via Trader Talent

KBC Sunset

Monday, February 24, 2025

Daily Market Overview

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Markets

• The German Parliamentary elections yesterday paved the way for Friedrich Merz of the winning CDU/CSU (28.6% of the votes) to take the initiative form a Grand Coalition with the Social Democrats of outgoing Chancellor Olaf Scholz even as the latter faced a sharp stack (16.4% of the votes, the worst outcome for the group in more than hundred years). In advance, this outcome was seen as the most market friendly with both traditional parties having the governing experience seen as the best combination to cope with economic and (geo)political challenges the country is facing. Even so, the reaction on European markets this morning/today was very guarded. Merz said the country needs an effective government as soon as possible. Still he suggested that this ‘as soon as possible’ probably still means two months of negotiations. Both parties are prepared to step up (targeted) fiscal spending. However, as the tree mainstream parties have no two third majority in Parliament, smaller parties including AfD, might complicate increasing spending on the likes of defense which needs a revision of the constitutional debt brake. While there might be ways to circumvent these debt brake issues, (FT suggests that current Parliament might already change the debt brake), the process might face a bumpy path. German yields opened the day even in slightly negative territory, but gradually the prospect for some fiscal stimulus further down the road triggered (admittedly) hesitant steeping of the German curve with yields changing between -1 bp (2-y) and +2.5 bps (30-y). The German DAX (+0.6%) outperforms the broader EMU indices (EuroStoxx 50 -0.5%). The euro in Asia trading looked like preparing an attack on the EUR/USD 1.0533 YTD top, but momentum already dwindled going into the start of European trading. At 1.047, the pair currently trades almost unchanged from Friday’s close. Whether it is related to the outcome of the German elections or to hope on a Ukraine ceasefire is unclear, but CEE currencies again outperform today.

• US markets are looking for direction after a rather abrupt risk-off repositioning on Friday. This sell-off was partially triggered by disappointing US data (PMI’s). We look out whether uncertainty due to the Trump announcements/ policy at some point might become negative for the US economic exceptionalism narrative. The jury is still out. The Trump administration taking several measures against China including targeting investment in (strategic) US sectors and other trade-related measures, suggest that the trade war is at risk of further escalating rather than cooling down. US equities at the open show only a highly unconvincing rebound after Friday’s sell-off (Nasdaq +0.1% vs 2.20% decline on Friday). The rebound in US yields is also negligible after Friday’s decline of +/- 7.0 bps. Regarding the data later this week, in the US we look out for US consumer confidence (conf. board tomorrow) and the January PCE price deflators (Friday). At the end of this week EMU member states, including Spain, France and Germany will already publish preliminary February CPI data.

News & Views

• The German Bundesbank in its monthly bulletin projected slight growth in the first quarter of this year following a 0.2% Q/Q decline in Q4 2024. Factors like high uncertainty, increased financing costs, and low capacity utilization still weigh on investments, but recent improvements in order intake could support demand. Exports might perform better, especially if there are anticipatory effects due to potential US tariffs. Private consumption and services are expected to continue supporting the economy. The German national bank also backed the case to raise the debt brake (which limits public deficits to 0.35% of GDP). “Binding fiscal rules make a very important contribution to ensuring solid state finances. In principle, however, it is entirely justifiable to adapt the debt brake's borrowing limit to changing conditions when the public debt ratio is low.”.
• The Belgian debt agency conducted its first regular OLO-auction of the year. They raised a combined €3.04bn by tapping OLO 102 (€0.71bn 2.7% Oct2029), OLO 73 (€1.28bn 3% Jun2034) and OLO 76 (€1.05bn 1.9% Jun2038). The auction bid cover was a good 2.39. Earlier this year, the BDA raised €7bn via a new 10-yr syndicated deal (OLO 103 3.1% Jun2035). Two more syndications, one with a 5-yr tenor and one with a longer-dated one (long 20y, 2046? long 25y, 2051?) are expected later this year. With regards to 2025 funding, the debt agency plans to issue €42bn of OLO’s to cover the lion’s share of the €44.65bn gross borrowing requirement.