KBC Sunset Market Commentary 12/05/2025 via Trader Talent

KBC Sunset

Monday, May 12, 2025

Daily Market Overview

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Markets

• Markets are flying high following the “substantial progress” made during the first high-level US-Sino trade talks over the weekend. US Treasury Secretary Bessent, one of the attendees, shortly before the European open briefed what this meant in practice: a sharp reduction on both sides in import tariffs for 90 days. The US cut tariffs on Chinese goods from 145% to 30%. This level consists of the 10% base rate currently in place for all other countries and the 20% levy related to the separate issue of fentanyl. China in return lowered the rate to 10% from 125%. Risky assets shifted into an even higher gear after seeing the details, not least because US President Trump ahead of the talks suggested a much higher 80% tariff “seems right”. Bessent in an interview with Bloomberg a couple of hours later added a few more details to it. He said the 10% is a floor and it’s “implausible” the US would go below that level. The 34% announced on Liberation Day in turn is a ceiling. Adding the 20% fentanyl levy, which Bessent said could also be lowered if China takes action, brings that to a max tariff of 54%. Stock markets are on a tear, surging 1.7% in Europe and opening almost 4% higher in the US (Nasdaq). Pharmaceuticals do weigh on the performance with the sector underperforming on Trump’s aim to slash US drug prices. Core bond yields shoot up dramatically with curves bear flattening. Yields in the US rise between 5.2 (30-yr) and 11.1 bps (2-yr). And that’s only the beginning if Bessent’s “victory is a three-legged stool” view for year’s end comes true when the three parts of the US administration’s programme will be kicking in: a settlement to (most of) the trade disputes, having the tax bill done and deregulation across all industries. German rates add 5.4 bps to 13.6 bps in a similar shift. The 10-yr yield (2.64%) is returning to the gap opening levels (2.65%) in the wake Merz’ defense spending announcement early March. Bunds underperform vs. swap as well as European countries, pushing spreads lower both in semi-core and peripheral member states. It reflects a reversal of haven flows and possibly hopes for a similar quick breakthrough in US-European trade talks. It would reduce uncertainty materially and help avoid a sharp growth slowdown. Combined with the now-reduced disinflationary risk of cheap redirected Chinese goods flooding the European market, investors pare ECB rate cut bets materially. Money markets now assume the rate to be closer around 1.75% by year’s end than the 1.5% last Friday. This repositioning has some more room to go. The US dollar is the star performer in currency markets. EUR/USD at some point fell below 1.11 before paring losses to 1.112 currently, down from 1.1244 at the open. After losing the 1.1235 support, 1.1026 is the next reference to look at. USD/JPY surges to 148, the highest since the April 2 mayhem. The trade-weighted DXY came close to but never really tested 102. Other typical risk-on beneficiaries include the AUD and NZD as well as the Scandinavian currencies. The Swiss franc slips to EUR/CHF 0.937.

News & Views

• According to a survey of published by the German Ifo Institute, companies in the German Industry are assessing that they are drastically losing competitiveness. 24% of companies rated their competitiveness compared to countries outside the EU as low. Competition within the EU is also becoming tougher, according to 21%. Hardly any company saw its position improve against global competition. “We have never seen a slump like this in international competition in such a short space of time” Klaus Wohlrabe, Head of Surveys at Ifo was quoted. The automotive industry, which has been losing ground for around two years, is particularly hard hit. The situation also remains tense in the metal and chemical industries. Beverage manufacturers are comparatively stable – their position in international competition has hardly changed recently. Ifo in this respect urges the new government to take decisive action to prevent the German industry from even further falling behind in international competition.

• The unemployment rate in the Czech Republic in April remained stable at 4.3%. While still historically low, it compares to a level of 3.7% in April last year. The number of people looking for a job declined by 3.6k to 318.5 k. The number of vacancies rose by 4k to 95.8 k. The tight labour market and above average wage growth are mentioned as a factor of importance in the monetary policy assessment of the Czech central bank (CNB) as it is seen as contributing to services inflation. The CNB last week cut its policy rate by 25 bps to 3.5%, but indicated that any such easing steps have to be cautious and that monetary policy will remain tight with distinctively positive rates.