KBC Sunrise Market Commentary 04/03/2025 via Trader Talent

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Market Commentary

Markets

•          Not often was the different trading direction between US and European assets that outspoken as yesterday. Key European stock markets closed more than 1% higher with the Dax (+2.64%) outperforming. Intraday gains were topped off by deteriorating risk sentiment in the US. First, a rebalancing away from US to Europe has been going on since the start of the year. Adding to that was the expectation of a fast-track EU (defense) spending drift. Sunday’s safety summit in London addressed the collapsed US-Ukraine deal with Europe in a hurry to deliver military and financial support. The matter became even more urgent after US President Trump overnight froze all military aid to Ukraine. EC von der Leyen will propose options for new common financing mechanisms at Thursday’s EU Council. On a spending side-track, the outgoing German parliament is still planning to boost spending (defense & infrastructure) before the first meeting of the new parliament (end of March) in order to sidestep any potential blocking minorities. Whisper numbers reach up to almost €1tn. A final supportive (European) risk element came from discussions on the future of European Automotive Industry with the EC allowing companies more flexibility on CO2 targets and aiming to strengthen the competitive position. Today, Europe has a similar strategic dialogue on the future of the steel industry. Europe unleashing fiscal spending at stealth pace triggered a sell-off in European bonds with the very long end of the curve obviously underperforming. German yields added 4.4 bps (2-yr) to 9.9 bps (30-yr). The front end rose as well as higher-than-expected European February inflation numbers strengthening the case of an April pause after the ECB delivers a 25 bps rate cut (to 2.5%) on Thursday, dropping the “restrictive” label attached to its current monetary policy stance.

•          It was the complete opposite for US assets. US Treasuries outperformed with US yields losing another 4 to 6 bps. The belly of the curve outperformed the wings. The new upleg started following the release of the manufacturing ISM. The modest headline decline (50.3 from 50.9) hid awful details. New orders and employment slipped into contraction territory with price gauges accelerating. The ISM added to stagflationary worries with Trump’s policy mix at risk of backfiring against the US economy. Overnight, 25% tariffs against Mexico and Canada went into effect with Chinese tariffs rising from 10% to 20%. China immediately retaliated by imposing tariffs as high as 15% on US goods (mainly food and agriculture), banning exports to some defense companies and opening a complaint against the US at the WTO. The Canadian government also announced a package of counter-tariffs (25% on CAD30bn of goods with another CAD125bn coming in three weeks). Key US stock markets lost 1.5% (Dow) to 2.65% (Nasdaq). EUR/USD rallied from 1.0371 to 1.0487, readying a new test of first resistance at 1.0533 (YtD high). Today’s eco calendar is thin with President Trump’s first address before US Congress a risky wildcard tonight. Overnight moves suggest that it still pays to err on the side of caution with European stock markets set to open weak and yields handing back part of yesterday’s gains.
 

News & Views

•          S&P Global Ratings expects global government borrowing to hit a record $12.3tn this year. This 3% rise in sovereign bond issuance would bring the global total debt stock to a record as well, $76.9tn or 70.2% of GDP. For the US, S&P anticipates long-term issuance to creep higher to $4.9tn amid “wide fiscal deficits [seen above 6% by 2026], high interest spending and substantial debt refinancing requirement”. Global head of sovereigns at S&P Sifon-Arevalo said the largest economies keep relying on fiscal policy to “deal with crisis after crisis”, adding that this was fine and sustainable when you had the low borrowing costs from before the pandemic. But the rise in debt-servicing costs presents a much bigger problem, he said.

•          Oil prices tumbled yesterday to their lowest level since early December. Brent slipped $2 to $71.6 per barrel after OPEC+ said in a website statement it will go ahead with plans to revive some of the halted production. The decision to restore 138k barrels a day from April on was delayed several times due to unfavourable market circumstances (ie. too low oil prices). It was expected they would do so again this time around. US President Trump repeatedly called on the oil producing cartel to bring output back to push prices, and as such inflation, lower. The April production hike will be the first in a series to gradually restore a total of 2.2mln barrels by 2026. OPEC+ said this may be paused or reversed “subject to market conditions”, though.
 

Graphs

German 10-y Yield

The ECB is nearing a fine-tuning phase where back-to-back reductions are over. A rate cut in March (to 2.5%) may be complemented by removing the label “restrictive” on its policy stance as the debate on the neutral interest rate kicks off. For the long end of the curve, the escalating US trade war through risk aversion/growth worries conflict with upward yield pressures stemming from a massive defense investment wave that’s on the way.

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. The prolonged Fed rates status quo provides a solid bottom beneath front-end US yields. The long end is more vulnerable on how the explosive policy mix could backfire to the US economy as well.

 

Calendar & table

Contacts