KBC Sunrise Market Commentary 05/05/2025 via Trader Talent

Please click here to read the PDF version

Market Commentary

Markets

•          The risk rally continued on Friday. European stocks soared by over 2%, catching up with US gains on Thursday (strong Q1 earnings from the likes of Microsoft and Meta). US stock markets gained over 1%. Late on Thursday, Chinese media reported that the US has been proactively reaching out to China through various channels, seeking to negotiate on tariff issues. These vibes spilled into Friday’s session with the WSJ reporting that Beijing is considering ways to address the US administration’s concerns over the country’s role in the fentanyl trade as an icebreaker to get onto speaking terms. An official statement from China’s Commerce Ministry also indicated that it was weighing starting talks with the US, expressing Beijing’s wish to “show sincerity” to talk. In previous official comments, China set slashing steep tariffs as a first condition for negotiations. Gradually walking back on the most dramatic trade talk triggered a huge short squeeze on stock markets since April 9 (90-day pause) with investors and markets putting worst case scenarios to bed. The US is expected to land some first bilateral trade deals (eg India) this week which could give some guidance on how far early tariff rates can be effectively reduced. In the meantime, it helps that economic hard data confirm that thinking, though we agree that quite some frontloading is involved and that sentiment data paint a grim picture. Friday’s strong April payrolls report was testament to the hard data narrative. The US economy added 177k jobs, beating 138k consensus (but 58k downward revision to previous two month’s numbers). The unemployment rate stabilized at 4.2% with a slightly higher participation rate (62.6% from 62.5%). Wage growth was broadly in line with consensus as well (+0.2% M/M & +3.8% Y/Y). The big market reaction to the numbers shows that it was still positioned for worse news. The US yield curve bear flattened with yields rising by 6.6 bps (30-yr) to 12.4 bps (2-yr). US money markets slashed June Fed rate cut bets from around 60% to 30%. Our preferred scenario remains one of the extended pause stretching at least over Summer given outsized US inflationary risks and the Fed’s hawkish, but ignored, tone. The dollar erased earlier losses against the euro, falling back from EUR/USD 1.1380 to 1.13. German Bund yields rose by 7.6 bps (2-yr) to 9.4 bps (5-yr) last Friday with an upward surprise in EMU April inflation popping out. Lower energy prices prevented an even bigger increase. Headline, core and services inflation increased by 0.6% M/M, 1% M/M and 1.3% M/M respectively to 2.2% Y/Y, 2.7% Y/Y and 3.9% Y/Y. EMU money markets still bank on aggressive ECB rate cuts, starting in June. We are still in favour of pause to see how the tariff narrative unfolds. The 90-day pause stretches beyond the June meeting. Today’s eco calendar is empty apart from the April services ISM and a $58bn 3-yr Note auction. We expect a wait-and-see attitude going into Wednesday’s FOMC decision. Risk sentiment is reliant on ongoing trade talk/discussions.
 

News & Views

•          The price of a barrel Brent oil slumped to the April lows just north of $59 this morning. Losses could stack up all the way to $50 (2018 low) should the April support break. The collapse follows OPEC+’s decision on Saturday to raise supply next month by another 411k barrels. The surprise move follows last month’s one where the oil cartel announced a similar-sized restoration of output, which was three times more than expected. It raises concerns over a supply glut at a time where global demand is tepid. Saturday’s call, just as April’s, is at least partially designed to punish nations including Kazakhstan and Iraq that are producing beyond their quota with lower prices.

•          Australia’s Labor Party secured a landslide victory in Sunday’s federal elections. It’s on track to win 86 seats, well over the 76 needed to retain its majority, compared to the 2022 election outcome of 77 seats. Sunday’s outcome gives the current and next prime minister Albanese a strong mandate, which seemed unlikely only two months ago. Labor was trailing the Liberal Party in the polls until early March. Albanese during the campaign had pledged a major boost to public spending, covering amongst others billions of dollars on healthcare, increased wage for care workers, subsidies for home solar batteries and childcare services. On the foreign front, Albanese has to cope with Trump’s trade war and an economically weakening Chinese partner. Australian markets approved the clear-cut election results with a rise of the Aussie dollar against an overall weaker USD. AUD/USD appreciates towards the 0.65 area. Australian sovereign yields rise between 2.7 and 5 bps in a bear flattening move.
 

Graphs

German 10-y yield

At the April meeting, confidence that inflation is returning to 2.0%, allowed the ECB to reduce to policy rate to 2.25%, reaching neutral territory. The ECB now moves to an outright data dependent approach, but overall uncertainty remains elevated. This could lead to a prolonged policy pause. At the same time, German bunds ever more gain safe haven status as uncertainty with respect to US assets intensifies. This for now slows the rise in LT Yields.
 

US 10y yield

The Fed’s updated forecasts in March are full of stagflation risks. The Fed’s priority remains inflation until growth is visibly weakening. It means the extended pause announced in January got confirmed, in theory supporting the bottom below front end yields. The long end remained more vulnerable for how the explosive policy mix could backfire to the US economy. Treasuries slid in the Sell US trade before finding a short term bottom.
 

Calendar & table

Contacts