KBC Sunrise Market Commentary 26/05/2025 via Trader Talent

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Market Commentary

Markets

•          US President Trump unexpectedly dropped a bomb on Friday by recommending a 50% tariff on EU goods effective immediate June 1st as he believed that the bloc wasn’t negotiating in good faith. Treasury Secretary Bessent added that he hoped it would light a fire under the EU. Apparently it did. A phone call between Commission President von der Leyen and US President Trump resulted in the latter pushing the negotiation deadline back to July 9 (in line with the previous end date of the 90-day pause), but the consequence of a “no-deal” remains the 50% tariff rather than the 20% reciprocal tariff charted in Washington’s Rose Garden on Liberation Day. Von der Leyen said that Europe is ready to advance talks swiftly and decisively with Trump cherishing the very nice call.

•          Trump’s rant on social media covered an otherwise quite trading session by risk aversion on Friday. European stock markets lost 2% by the closing bell while US benchmarks suffered a setback of up to 1%. German Bunds rallied with yields sliding 6 to 7 bps across the curve as investors reverted to upping ECB rate cut bets. If any, the episode highlights what Lagarde labelled “unpredictable uncertainty”, making it very hard to assess economic and inflationary consequences. US Treasuries initially spiked higher, but failed to stick with gains. Daily US yield changes varied between -1.8 bps and +0.2 bps with the belly of the curve outperforming the wings. The US dollar sold off with the trade-weighted greenback closing at 99.11 from a start at 99.89. A test of the April low (97.92) is in the making. Friday’s reaction function shows that Trump’s bullying tactics trigger “sell America” vibes with investors. EUR/USD’s rise on Friday is testament to that: 1.1362 from 1.1281.

•          Risk sentiment improves this morning with the July 9 deadline back in place. Stakes are now higher though. German Bund and European equity futures undo most of Friday’s moves. EUR/USD extends its march beyond 1.14. It’s probably too early to draw firm conclusions as the absence of UK (Spring Bank Holiday) and US (Memorial Day) investors squeezes market volumes today. We warn to get over-enthused and stick with a negative bias against the dollar. The EMU eco calendar is empty. ECB president Lagarde speaks on Europe’s role in a Fragmented World and it’s unclear whether she’ll touch on monetary policy during sideline interviews.
 

News & Views

•          Moody's raised the outlook on Italy’s Baa3 rating to positive from stable, reflecting the improved fiscal outlook against the backdrop of a better-than-expected fiscal performance in 2024 and the stable domestic political environment. Last year’s budget deficit came in at 3.4% compared to the 3.8% projected. Moody’s expects a further decline to 3% by 2026 as widening primary surpluses offset rising interest payments. The debt ratio should rise through 2027 (138.4% from 135.3% in 2024) before moving to a gradual declining trend from 2028. The positive outlook is also supported by a robust labour market, sound household and corporate balance sheets and a healthy banking sector. Together with further expected improvements in Italy’s external position they support economic resilience and reduce Italy's susceptibility to event risk. Its Baa3-rating takes into account Italy's large, wealthy economy and effective institutions and governance relative to rating peers. Moody’s adds, however, that the high debt burden remains a constraint on its credit profile.

•          European officials familiar with the matter said they’re increasingly confidence that Bulgaria will soon meet all requirements for adopting the euro. With a history of narrow deficits, a low debt ratio and currency stability, above-target inflation was one of the final sticking points after the Russian invasion triggered a spike in prices. The European Commission together with the ECB is concluding the convergence report. Its release is due for early June. A positive assessment followed by EU leaders’ blessing at the end of June summit may pave the way for Bulgaria’s euro adoption from the beginning of 2026.
 

Graphs

German 10-y yield

Confidence that inflation is returning to 2% allowed the ECB to reduce to policy rate to 2.25% in April, 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 again as President Trump’s big, beautiful, deficit-increasing bill moves its way through US Congress.

 

Calendar & table

Contacts