KBC Sunrise Market Commentary 16/06/2025 via Trader Talent

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Market Commentary

Markets

•          Israeli strikes against Iranian energy facilities dominate headlines this morning and temporary pushed Brent crude prices from $75/b to $78/b, matching last week’s high. Attacks and counterattacks enter their third day. On Friday, geopolitical event risk pulled global stock markets over 1% lower. Higher oil prices intervened with typical risk-off correlations. Core bonds sold off with German Bunds underperforming US Treasuries. German yields added 4 bps (2-yr) to 5.7 bps (10-yr) across the curve. Changes in the US ranged between +2 bps and +3 bps. The supply-side energy shock further complicates central banks’ quest to get inflation sustainably back to 2%. In theory, they should ignore this supply shock, especially as it could dampen growth as well. That’s of course an easier thing to do when inflation is running comfortable below 2% instead of the current situation of still-above target price pressure. Visibility on the strength of the disinflationary process will be very low in coming months. Flying in the dark on inflation ceteris paribus implies sticking to longer policy rate pauses. Recall that lower oil prices (together with a stronger euro) triggered last week’s substantial downward revision to CPI forecasts this year and next and a final 25 bps ECB rate cut. The US dollar got some temporary reprieve after reaching multi-year lows earlier last week. Since the US turned net energy exporter in 2019, the dollar and oil prices became positively correlated especially during oil supply shocks and geopolitical tensions. Closing at EUR/USD 1.1549, the greenback remains vulnerable to further losses though. Especially as geopolitics often only have a short shelf-date as market-moving theme.

•          Geopolitical headlines trump today’s light eco calendar with only the June Empire Manufacturing survey and a $13bn 20-yr US bond auction scheduled. The ever more uncertain context risks complicating tonight’s auction more than last week’s well-received 10-yr and 30-yr sales. Market focus shifts later this week to central bank meetings in Japan (tomorrow), the US and Sweden (Wednesday) and the UK, Norway and Switzerland (Thursday). The Fed will keep its policy rate unchanged. The updated Summary of Economic Projections likely shows downward GDP revision and upwardly changed CPI forecasts. As long as the US labour market shows no signs of cracking, the only needle in the Fed’s compass is inflation. Risks for the dot plot are equally skewed to the hawkish side.

 

News & Views

•          Rating agency Fitch stripped Belgium of its double A-rating on Friday. The downgrade from AA- to A+ with a stable outlook reflects a structural weakening of the fiscal position over the last few years, offsetting the strengths of its diversified and wealthy economy. Fitch said that existing fiscal imbalances remain only partially addressed. The government outlined some 4.7% of GDP in gross savings to be implemented gradually until 2029. But Fitch citing Belgium’s Court of Audit warned for an overestimation with a third of the savings coming from second-round effects. Meanwhile, already sizeable ageing-related costs are likely to increase further while higher defense spending adds to fiscal pressures. It expects the debt ratio to continue to rise amid fiscal deficits remaining close to 5% of GDP over the medium term. This years’ shortfall would mount to 5.5%, up from 4.5% in 2024. Debt would exceed 110% of GDP by end-2026 from 104.7% last year and keep rising thereafter. Fitch projects GDP growth to slow to 0.8% in 2025.

•          Chinese consumption was unexpectedly strong in May. Retail sales rose by 6.4% y/y, easily topping the 4.9% expected and quickening from April’s 5.1%. The statistics office said that “[…] the efforts to stabilize economy and promote development have paid off.” Other elements have contributed as well, including an earlier than usual start of the shopping festival. That’s raising questions about the durability of last month’s improvement, particularly in the still-challenging (trade) environment. A mild slowdown in industrial production (5.8% from 6.1% y/y), in fixed asset investments (3.7%) and the continued slump in the property sector (-10.7%, deepening from 10.3%) are indicative of that. China’s yuan is unaffected by the numbers. USD/CNY holds steady at the recent lows around 7.18.
 

Graphs

German 10-y yield
 
Confidence that inflation is returning to 2% allowed the ECB to reduce to policy rate to 2.0%, reaching neutral territory. The ECB now moves 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 when market focus shifted from 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, supporting the bottom below front end yields. Long term bond yields’ trend higher on President Trump’s big, beautiful, deficit-increasing bill recently stalled again on renewed growth concerns. This market flip-flopping between the fiscal and economic theme is here to stay.

 

Calendar & table

Contacts