KBC Sunrise Market Commentary 21/08/2025 via Trader Talent

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Market Commentary

Markets

•          Markets remained mired in mostly technical, order-driven trading yesterday. On equity markets, Tuesday’s ‘rotation’ out of some US tech-related stocks to some extent continued (Nasdaq -0.63%, Dow +0.04%, Eurostoxx 50    -0.20%), but it still occurred in an orderly fashion. Core bonds again attracted a mild (safe haven?) bid. At the end of the day US yields eased up to 1.5 bps (30-y), off softer levels intraday. This intraday rebound in yields was at least partially supported by the minutes of the July Fed meeting. The report said that ‘participants generally saw risks to both sides of the Fed’s dual mandate (upside for inflation, downside to employment), but that a majority judged the upside risk to inflation to be the greater of the two risks, with the impact of tariffs still containing a substantial degree of uncertainty. At that time, the labour market situation was still assessed to be solid. Of course this picture might have evolved after this month’s (labour and inflation) data. In the risk assessment, several members also note concerns on elevated asset valuations. Bunds slightly outperformed Treasuries (2-y -2.5 bps, 10-y -3.3 bps). ECB’s Lagarde in a speech assessed that “Recent trade deals have alleviated, but certainly not eliminated, global uncertainty”. This might still translate to slower growth this quarter. The ECB staff will factor in the impactions of the EU-US trade deal in its projections that will be available at the September 11 policy meeting. On FX markets, the dollar briefly dipped as US president Trump urged Fed Governor Lisa Cook to resign on allegations of mortgage fraud. The issue again raised concerns on political interference with Fed independence. Cook already indicated that she intends to stay. Initial USD losses were limited and short-lived. DXY closed in well-known territory (98.22) as did EUR/USD (1.165). UK gilt markets showed surprising/remarkable outperformance despite higher than expected July price data (yields lower by 6-7 bps across the curve). Sterling initially tried to gain after the inflation release, but was dragged lower later by the reversal in yields. EUR/GBP closed near 0.866 (from 0.863).

•          EMU but also US PMI’s take center stage today. The Philly Fed business outlook and US weekly jobless claims will also fuel the debate on the Fed reaction function as markets look forward to tomorrow’s Jackson Hole address of Fed Chair Powell. The EMU composite PMI is expected to confirm a scenario of lackluster growth (50.6). Maybe there is room for some improvement as trade-uncertainty eases (to some extent). After recent mixed/divergent US labour and inflation data, US PMI’s this time also have potential to cause some intraday repositioning with (both FI and FX) markets maybe slightly more sensitive to weaker/softer than expected outcome.
 

News & Views

•          S&P global this morning already published PMI business surveys for India, Japan and Australia. The Indian survey pointed at record expansion in private sector business activity in August with the composite PMI surging from 61.1 to 65.2. Sub-sector data revealed broad-based strength across India's economy as growth in both manufacturing and services output accelerated. Expectations for next 12 months also improved strongly, underpinned by the demand outlook. As for pricing trends, the latest survey data indicated an intensification of inflationary pressures across India's private sector. Japanese overall business activity expanded at the quickest pace in six months (composite 51.9 from 51.6). Like in India, the upturn was broad-based with a fresh rise in factory production accompanying a further strong increase in services activity. The manufacturing outlook nevertheless remains subdued with new orders still falling. Growth is being largely fueled by domestic demand with companies recording lower foreign demand (eg yesterday’s trade data; US tariffs hurting). Average input costs rose sharply but intense competition and requests from clients for discounts dampened overall pricing power resulting in a stronger squeeze in operating margins. Finally, also the Australian PMI (54.9 from 53.8) beat consensus with private sector output expanding at the fastest pace since April 2022. Domestic factors (RBA rate cuts) supported better conditions domestically, but external conditions also started to pick-up. To cope with demand, Australian firms raised staffing levels in the services sector. It’s the best of both worlds with price pressures also easing according to the survey. Companies broadly cited hopes for better market conditions and business expansion plans to drive growth in the year ahead…
 

Graphs

German 10-y yield
 
Confidence that inflation is returning to 2% allowed the ECB to reduce to policy rate to 2%, reaching neutral territory. The ECB moved to an outright data-dependent approach, but overall uncertainty remains elevated. German bunds ever more gain safe haven status as uncertainty with respect to US assets intensifies. This slowed the rise in LT yields with market focus fluctuating between tariff wars to public finances.

 

US 10y yield

The Fed’s priority stays on inflation until the labour market is visibly weakening. It suggests steady policy rates at least until after summer. LT bond yields’ trend higher on President Trump’s big, beautiful, deficit-increasing bill stalled on renewed growth concerns and found a short-term equilibrium in the meantime. This market flip-flopping between the fiscal and economic theme is here to stay.

 

Calendar & table

Contacts