KBC Sunrise Market Commentary 12/03/2025 via Trader Talent

Please click here to read the PDF version

Market Commentary

Markets

•          Markets recently were haunted by multiple, often contradictory story lines ranging from the potential impact of US tariffs on growth and inflation inside and outside the US, the impact of a fiscal U-turn in Europe, the potential consequences of a cease-fire in Ukraine and the presumed reaction function of central bankers (in particular the Fed and the ECB) on incoming regular inflation and activity data. This complex mix was and remains a perfect prescript of heightened volatility. Yesterday, the storylines of tariffs and Ukraine prevailed. After a ‘calm’ start in Europe, President Trump again rocked the boat. While the US as planned held to raising tariffs on all steel and aluminum to 25% from today on, Trump said Canada would be hit by and additional levy of (total 50 %) as Ontario had announced a retaliatory levy on electricity exported the to the US. This outright escalation of the trade war triggered a new risk-off wave. In the end, Trump’s 50% tariff was scaled back to 25% (Ontario also backtracked). It caused some intraday relief for US equities, but US indices still closed well in negative territory (S&P 500 -0.76%). Despite intraday uncertainty, US yields intraday showed a bottoming out process after recent steep declines. US yields added between 5.5 bps (30-y) and 6.8 bps (5-y). Risk premia outweighing growth fears? In Europe, the established steepening trend of the yield curve unabatedly continued. The 2-y German yield eased marginally (-1.7 bps) but longer maturities again jumped higher (30-y, +6.6 bps). Headlines filtering through on a potential ceasefire in Ukraine (agreement between the US and Ukraine now being forwarded to Russia) only supported the revive Europe trade, with both inflation expectations and real yields rising further. The announcement of the ‘Ukraine’ agreement, also briefly propelled EUR/USD to a new correction top near 1.0945 (close 1.092). The dollar global remained in the defensive with the DXY testing the lowest levels since end October (103.42).

•          Asian markets are trading mixed this morning. Uncertainty in US (tariff and other) policies remains elevated. The proposal on a ceasefire for the war in Ukraine might be supportive for European (equity) markets. At the same time, the EU this morning already announcement counter-measures planning to impose tariffs on €26 bln of US imports, potentially escalating the trade war. Later today, the ‘data story-line’ might also again come into play with the US February CPI inflation data. Markets expect a 0.3% M/M rising for headline and core inflation resulting in respectively 2.9% and 3.3% Y/Y inflation. Overall noise complicates the reaction function. Even so, a figure in line/higher than expected might supported a tentative bottoming in yields after recent setback. Despite Powell’s balanced wait-and-see guidance, a soft figure might trigger a retest of recent lows. In Europe, the ‘ECB and Its Watchers conference’ in Frankfurt might yield interesting headlines, too. How close is the ECB to a pause or even to the bottom of its easing cycle? First indications this morning suggest EMU yields to stabilize near recent peak levels in the wake of the proposal in a cease-fire in Ukraine. EUR/USD eases slightly. In any both cases, we expect any corrections to stay limited.
 

News & Views

•          The US House approves (217-213 vote) a proposal to keep the government funded into fall (September 30) and avoid a government shutdown from kicking in this weekend. The proposal extends funding at fiscal 2024 spending levels, but includes a $6bn increase in military spending and more money for border enforcement. Cuts are made in nondefense spending and Washington DC’s budget. The continuing resolution now heads to Senate where the 60-vote threshold means that Democratic support will be needed. Republicans have a 53-47 majority in Senate. There’s no option included to revise it and return it to the House so it’s either approving or blocking.

•          Portugal is heading for a third election in less than four years after PM Montenegro lost a confidence vote last night. Opposition socialists, other left-wingers and the extreme right combined forces to shoot down the minority government triggered by a corruption scandal around the PM. Latest election polls show Socialists leading with 30.8% of the vote ahead of 25.8% for the ruling Democratic Alliance coalition. New elections are expected to take place in May.
 

Graphs

German 10-y Yield

The ECB is nearing a fine-tuning phase where back-to-back reductions are over. The March rate cut (to 2.5%) was complemented by labelling the policy stance as meaningfully less restrictive, opening the door for a potential pause in April, our preferred scenario. For the long end of the curve, upward yield pressure stems from a massive defense investment wave that’s on the way. A test of the 2023 top just above 3% is in the cards.

US 10y yield

After three consecutive cuts, the Fed installed a pause in January which we expect to last at least through June. The Fed wants to see “serial readings” suggesting inflation is progressing towards target. A pause simultaneously offers time to a clearer view on president Trump’s policies. Front-end US yields question recent Fed guidance on a rates status quo. The long end is also vulnerable on how the explosive policy mix could backfire to the US economy.
 

Calendar & table

Contacts