KBC Sunrise Market Commentary 25/02/2025 via Trader Talent

Please click here to read the PDF version

Market Commentary

Markets

•          US stock markets traded heavy for a second session straight. They eventually closed at the session lows after hitting an air pocket in the final ten minutes of trading. The S&P 500 and Nasdaq respectively lost 0.5% and 1.2%. From a technical point of view, both indices are moving at a rapid pace from the top- to the downside of sideways trading ranges in place since December. First support kicks in at 5773 (vs 5983 close yesterday) and 18832 (vs 19286) respectively. Following higher US CPI readings and the market reaction to them mid-February, we warned about different asymmetric risks in the US vs Europe. The bar for upward surprises in the US was high following the hawkish Fed repricing and initial Trump election euphoria, leaving scope for outsized reactions on negative scares. It’s the opposite around in Europe where peak growth pessimism and a too dovish ECB reaction function are the base scenario, suggesting room for outsized moves in case of some good news. Over the past two sessions, we’ve seen some of that materializing in the US. US February PMI’s and Michigan consumer confidence shifted the needle from a good growth, high(er) inflation scenario to a weak(er) growth, high(er) inflation tale. Early initiatives by the US government like for example the DOGE efforts risk having outsized negative effects on growth as they increase consumer uncertainty and stall capex and hiring plans by companies. This negatively effects risk sentiment with US Treasuries rallying as the onus shifts to the stagnation-part of stagflation. Today’s February consumer confidence by the Conference Board could be testament to this short term momentum shift in trading. US treasury yields lost 2.5 bps to 3.7 bps yesterday with the belly of the curve outperforming the wings. Both the US 2-yr yield and the 10-yr yield are at risk of losing YTD support at respectively 4.15% and 4.38%. It’s worth noting that yesterday’s $69bn 2-yr Note auction produced some record demand metrics, stopping a full bp through the WI yield. The US dollar shows more and more signs of fatigue with EUR/USD yesterday testing first resistance at 1.0533 (YTD top). Lack of some EUR-strength is probably the only thing preventing a short term break higher right now. In this respect, we follow up on German spending plans (see News & Views), coalition talks, EU spending efforts (March 6 emergency summit) and recent hawkish ECB rhetoric hinting at a potential April pause in the cutting cycle. In this respect, we pay close attention to the central bank’s quarterly wage indicator. Recall them rising by a record 5.4% annual pace in Q3 with ECB president Lagarde pinning her hopes on a significant slowdown this year. Speeches by central bank governors and the US Treasury’s $70bn 5-yr Note auction are wildcards for trading.

 

News & Views

•          Germany’s chancellor-to-be Merz is said to have opened up talks with the Social Democrats (SPD) to fast-track as much as €200bn in special defense spending through the lame duck parliament, Bloomberg reported citing people familiar with the discussions. They are exploring ways to get around the country’s constitutional debt restrictions to free up resources to upscale the military. One approach would be similar to June 2022. Back then the ruling SPD-led coalition teamed up with the CDU/CSU opposition to approve a €100bn special fund, a move that required a constitutional change. The roles have turned this time around as did the size of a potential new package. Other options would be to expand the existing €100bn fund or to adapt the debt brake. Either way, they all require a two-third majority that is easier to be found in the current, outgoing legislature than in the next (March 24) due to a blocking minority on the far left and far right have after Sunday’s elections.

•          The central bank of South Korea (BoK) cut the policy rate by 25 bps to 2.75% this morning. Governor Rhee said market views of two to three more rate cuts this year were in line with the BoK’s view, clearly hinting at more easing to come. Based on the views disclosed, these follow-up rate cuts should not come at every next meeting, though. Such guidance came after the central bank downgraded its growth forecast again to a below-average 1.5% for this year, citing US protectionist policies as one of the factors. South Korea is heavily trade-reliant while private consumption and construction is souring as well, along with consumer confidence that got seriously dented by the political chaos in December of last year. Rhee urged the government to step in with more spending (to the tune of KRW 15-20tn) to help prop up growth since monetary policy cannot do all of the heavy lifting alone. The South Korean currency reacted stoic near its YtD lows around USD/KRW 1431.
 

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 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