KBC Sunset Market Commentary 01/04/2025 via Trader Talent

KBC Sunset

Tuesday, April 1, 2025

Daily Market Overview

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Markets

• In ‘normal times’ the first (trading) day of a new month/quarter would make investors look out for high profile data to potentially set tone for upcoming trading trends. Also today, overall volatility stays elevated, but this for sure was/isn’t due to the data. All kinds of rumors and analysis on the US tariffs to be announced tomorrow in a White House Rose Garden event and strong wordings from EU Commission President von der Leyen on EU retaliation measures (cf infra) continue to haunt global markets. Core bond markets, alongside gold, continue to be main beneficiaries from safe haven flows. German yields are currently declining between 4.5 bps (2-y) and 7.5 bps (10-y). EMU March inflation data were close to/marginally softer than expected (headline 0.6% M/M and 2.2% Y/Y, core 2.4% from 2.6% vs 2.5% expected). It’s of course good news for the ECB that inflation eases as expected. Even so, in a long-term perspective, the March data probably won’t decide on the ECB monetary policy approach later this year. After yesterday’s ‘hesitation’ on the chances of an April cut, markets currently again discount about 80% of a 25 bps step in April. This in our view makes sense. Even as we are well aware that the trade conflict (amongst others) can take an unexpected turn, we are far less convinced that the ECB will be able to cut rates back to 2.0% (or even lower) as markets are currently again considering. The risk-off sentiment outweighs most other considerations, but technicals are also coming into play with the 2-year German yield revisiting the 2.0% support area and the 10-y near the 2.65 area (Mid-Jan Top, early March gap). US yields are easing between 0.6 bps (2-y) and 4.0 bps (30-y). The 2-y (3.87%) is holding within reach of the March correction lows (3.82 area). A break below would suggest the Fed taking action to support growth, which is far from evident given recent jump in survey inflation expectations. The decline in LT US yields is still mainly driven by a further decline in real yields (risk off and/or fears on faltering growth). After finishing this report, the US JOLTS job openings and US manufacturing ISM might given some indication on the state of the US economy going into the tariffs’ announcement. Even so, any reaction probably will tell at least as much on investor sentiment/market positioning than on the substance of the data. European equities (EuroStoxx50 +0.75%) are ‘capturing’ yesterday’s late-session WS rebound US indices are again losing ‘modest’ ground (S&P -0.4%). This very much looks like erratic trading in an highly uncertain context. On FX markets, the dollar slightly outperforms, with DXY trading near 104.3. However, the index still holds the rather tight sideways range in place since early March. The overall trend masks modest (daily) USD outperformance against the euro (EUR/USD 1.0795) but underperformance against the yen (USD/JPY 149.5). These cross rates also hold in a ST consolidation/wait-and-see modus. In in the outskirts of the EMU, a solid performance of the likes the Swiss Franc (EUR/CHF 0.953) and the Scandi currencies (EUR/SEK 10.82; EUR/NOK 11.31) is catching the eye.

News & Views

• The EU is prepared to retaliate against potential US tariffs with measures targeting US services exports, including Big Tech companies. European Commission President Ursula von der Leyen emphasized the EU's readiness to negotiate from a position of strength and take firm countermeasures if necessary. Currently, the EU delayed extra duties of up to €26bn of US goods and didn’t respond to 25% tariffs on cars yet. Potential actions could include suspending intellectual property rights and excluding US companies from public procurement contracts. The bloc may also use the “anti-coercion” instrument for tougher measures. The EU aims to negotiate first to avoid escalating tariffs, which could harm both economies (fueling inflation, costing jobs and creating more bureaucracy via new custom procedures). The US has broader demands than tariff levels, including changes to EU tax rates and health standards, and the removal of digital taxes on US tech companies.

• The Polish statistical office said that the government’s budget deficit widened from 5.3% of GDP in 2023 to 6.6% of GDP in 2024. In October, the Ministry of Finance estimated the gap at 5.7% of GDP. Finance minister Domanski said that accelerating the spending of funds to rebuild defense capabilities (according to the EU methodology), lower than expected consumption (higher savings) translating into lower VAT revenues and flood-related expenses are the main reasons for the higher deficit in 2024. Poland’s debt ratio rose from 49.5% of GDP in 2023 to 55.3% of GDP in 2024.