KBC Sunrise Market Commentary 07/04/2025 via Trader Talent

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Market Commentary

Markets

•          On Friday, the post-Liberation Day risk-off move evolved to outright market panic. European equity markets from the open drifted further south. Around noon, China announced retaliation to the US tariffs, matching the baseline US 34% tariff with a similar levy, adding a series of additional ‘technical’ measures. The China action only reinforced investor fears for a spiraling tit-for-tat escalation. Risk-off selling accelerated. US March payrolls were ok, with a 228k net job creation (48k negative revision from the previous month), a modest rise in the unemployment rate (due to higher participation rate) and close to expectations wage growth (0.3% M/M and 3.9% Y/Y). Even as the Trump administration sees this as supporting its approach, markets understandably only saw it as news from an old era. US yields at some point at the start of US dealings declined near 15-20 bps, but in nervous trading gradually tried to look for a bottom. This process was supported later in the session as Fed chair Powell at least tempered market hopes that the Fed might stand ready to reactivate the hoped for a Fed put. The Fed Chair basically reiterated its standing assessment that there is still a lot of uncertainty on the effects of the tariffs. It’s not clear what appropriate policy will be. Given that inflation is still elevated, the Fed should avoid that tariffs  turn out to be something more persistent. US yields further reversed a big part of the earlier decline closing “only” 1.8 bps (5-y) to 6.2 bps (30-y) lower. It didn’t help to contain the damage on the equity markets. Major US indices closed between 5.5% and 6% lower. German Bunds also captured a strong safe have bid with yields declining between 12.1 bps (2-y) and 6.3 bps (30-y). This time, the bund also substantially outperformed swaps, illustrating the safe haven run. Intra-EMU spreads widened modestly (10-y Italy +7 bps). On FX markets, the USD rout took a breather. DXY rebounded from 101.98 to 103.02. EUR/USD declined from the 1.105 area to 1.0956. USD/JPY closed just below 147. The likes of the Aussie dollar were hit hard after the China retaliation. AUD/USD tumbled from the 0.63 area to close at 0.602!

•          This morning, the risk sell-off/panic in Asia only accelerates. The Nikkei and the CSI 300 are ceding about 7%. The Hang Seng prints 12% lower. Despite Powell’s ‘guidance’ that the Fed for now will hold a wait-and-see modus, US Treasury yields in very volatile trading again decline up to 15 bps at the short end of the curve as markets ponder whether the Fed can stay on the sidelines if current market and economic uncertainty unravels further. European and US equity futures also again suggest losses of about 4%. Eco data today are very few, and in any case won’t be of any relevance for markets. On interest rate markets, we look out how they continue to assess the central bank’s reaction function when balancing the risk of higher inflation and at the same time rising recessionary and financial stability risks. Several governments outside the US (including EMU) are considering additional fiscal measures to mitigate the fall-out from the tariffs. Additional fiscal spending on top of what is being put in place for defense in theory at some point should put a floor for long-term yields. Question is whether/when markets will pick up this factor. On FX, despite Friday’s pause, we still see risk for a further loss of confidence in the US dollar.

 

News & Views

•          The Brent crude oil price fell below $64/b for the first time since early 2021 this morning, extending the slide started after Trump’s tariff policy announcement ($75/b). Global demand/recession worries combine with supply factors. OPEC+ last week announced a surprisingly large output hike by eight members (+411k b/d in May, triple the expected amount) and news agency Reuters yesterday reported that Saudi Arabia slashed official selling prices for its flagship Arab light crude for Asian buyers by $2.3/b to $1.2/b above the average of Oman and Dubai prices. That’s the biggest decline in more than two years and the second consecutive month that state oil company Aramco lowers prices (to the lowest level in four months).

•          Chinese policymakers discussed measures to stabilize the economy over the weekend. Amongst others, they want to frontload stimulus plans to boost consumption according to people familiar with the matter. Subsidizing some exports and setting up a stabilization fund to shore up the stock market are also under consideration. China also indicated room to ease borrowing rates and reserve rates for lenders if needed while a weaker currency is also thrown into the mix. USD/CNY (7.31) approaches the multi-year highs around 7.33.
 

Graphs

German 10-y yield

The ECB’s March rate cut (to 2.5%) was complemented by labelling the stance as meaningfully less restrictive, leaving limited room for easing. Seeing the huge spending initiatives, we think the ECB will seize the moment in April (2.25%) before the window of opportunity closes. The upcoming massive defense investment wave pushed the long end of the curve higher, but the path to 3% is interrupted by global tariff uncertainty.

US 10y yield

The Fed’s updated forecasts in March are full of stagflation risks, contrasting with the still-upbeat message brought by Chair Powell. 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 remains more vulnerable for how the explosive policy mix could backfire to the US economy. Risk-off currently outweighs those considerations.

 

Calendar & table

Contacts