KBC Sunset Market Commentary 16/05/2025 via Trader Talent

Daily Market Overview

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Markets

•          “Time to go back home”. US President Trump wrapped up his road trip through the Middle-East, sealing substantial business and defense contracts with Saudi Arabia, Qatar and the United Arab Emirates. Those agreements cover slightly over €1tn with (Qatari) plans to significantly increase them further. The investment deals helped lift spirits on (US) equity markets this week (perhaps also as his busy schedule kept him away from social media) with main indices on track to record a fourth consecutive weekly gain and pushing them above levels on the eve of “Liberation Day”. During his trip, Trump lauded his Secretary Treasury Bessent and his prominent role in trade talks. “When Bessent talks, markets listen”. They do not only listen, but also tend to rally unlike when trade czar Navarro or Commerce Secretary Lutnick enter the scene. Bessent’s Geneva talks with Chinese vice-premier He Lifeng led to a 90-day truce in the Sino-US trade war and kickstarted this week’s rally. The US trade team remains focused on Asian countries, but the likes of Japan indicated they aim for a good rather than a fast deal. People close to talks indicate that Japan targets a complete removal of tariffs on the key car sector, rather than falling back to Trump’s floor rate of 10%. Lacking the manpower and capacity to hold talks with all countries involved in the reciprocal tariff plan during the current 90-day pause, Trump said that other trading partners over the next two to three weeks will get letters to inform them of the tariffs they will pay to do business in the US. Ongoing discussions with the likes of South Korea and Japan also cover FX policy. The US believes that appreciating currencies from trading partners are part of the solution to shrink the trade deficit on the US goods balance. By stressing this part of the equation, the dollar’s recovery already showed signs of fatigue this week. Recent trade developments significantly reduced the tail risk of a severe global growth slowdown and a US recession. It put the fiscal story back on investors’ radar as the US House is wrapping up its Reconciliation Bill. Trump hopes to see that on his desk by Independence Day, in time to raise the US debt ceiling and in time to extend tax cuts from his first term. The US Committee for a Responsible Budget already warned for the devastating impact on public finances based on available information. They fear that the debt ratio could hit 125% or worst-case even 129% of GDP by 2034 (from 100% currently and vs baseline path of 117%). Annual budget deficits of 6.9%-7.8% would be the new standard with interest rate costs rising to up to 4.2%-4.4% of GDP by end 2034. The CFRB warning kicked in for US Treasuries with the 30-yr yield testing the psychologic 5% mark for already the third time this year. The test failed as the Big Beautiful Bill is still in its early stages of being marked up in various House Committees. The House hopes to pass it somewhere early June. That’s an eternity in Trump’s high-speed world. US eco data helped creating a more stable market setting towards the end of the week as well. Activity data point to a slowdown in the chaotic month of April, but disinflationary CPI/PPI data and improving sentiment indicators for May keep the goldilocks dream (avoiding recession and keeping disinflation on track) alive for now. Next week’s eco calendar is light on data with May global PMI’s (Thursday) and EMU Q1 wage growth numbers (Friday) exception to the rule.
 

News & Views

•          The Central Bank of Romania (CBR) kept its policy rate unchanged at 6.5%. The decision came in a context of elevated political uncertainty that caused the CB to allow the leu to depreciate within its managed floating regime before stabilizing it via interventions at a weaker level (EUR/RON 5.1055 currently). This leu weakening might complicate the disinflation process. In its policy statement, the CBR assessed that inflation in Q1 declined less than anticipated to 4.86% in March from (5.14% in December) as decreases of fuel and tobacco prices, alongside non-food sub-components of core inflation, were partly countered by the swifter increase in energy prices, administered prices and processed food prices. Details of a new inflation report will be published on Tuesday. The CBR indicates that Y/Y inflation will fluctuate until 2025 Q3. It is expected to decrease later but on a significantly higher path than in the previous forecast, falling no sooner than in 2026 Q1 and only to marginally below the upper bound of the target band (1.5%-3.5%). On Sunday a second round of the presidential election takes place between far right candidate George Simion who won the first round and the Mayor of Bucharest, Nicusor Bank, who has a more centrist profile.
 

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