KBC Sunset Market Commentary 02/06/2025 via Trader Talent

Investor reluctance towards US assets still proves the path of least resistance, as US president Trump warned on higher tariffs for steel (and aluminum) and as US-China trade talks apparently hit a roadblock causing mutual allegations. US equities, bonds and the dollar are all trading in red. Admittedly, losses remain orderly and the move also spills over to other (equity) markets, including Europe (EuroStoxx 50 -0.5%). Other core bonds (Bunds, gilts, Japanese bonds) also show more or less similar losses today. However, especially German Bund levels don’t trade at ‘near stress levels’ like their US counterparts. In this move the currency remains the key discriminating factor. USD weakness remains a by default means for investors to give their appreciation on the unpredictable swings in the Trump administration’s trade policy. In addition to the trade war and the risks it might cause for the US economy; markets are also pondering the idea of the trade war potentially turning into a capital market war. In its proposed Budget Bill; the Trump administration also included an item ‘ Enforcement of Remedies against unfair foreign taxes’ (Section 899). This might include additional taxing on foreign investors of countries that the administration deems to have discriminatory tax policies (e.g. a digital services tax on major US tech companies, minimum corporate taxes etc). The jury is still out whether and how such a measures might be implemented, but it adds another layer of uncertainty for investing in US assets whatsoever. In the run-up to publication of the US manufacturing ISM, US yields add between 3 bps (2-y) and 4 bps (30-y, 4.97%) with the 5% barrier again within reach. German yields add between 2.5 bps (2-y) and 3.5 bps (30-y). Aside from spillovers from the US, tomorrow’s EMU flash CPI and Thursday’s ECB meeting are a good reason for markets not to push further beyond ‘rich’ ECB easing that is currently discounted (ECB cycle low <1.75%). On FX markets, DXY is testing last week’s low near 98.7, the final ‘hurdle’ on the way back to the 97.92 YTD low. EUR/USD in a similar way is challenging the 1.1418 resistance. with the YTD top at 1.1573. The gain of Conservative candidate Nawrocki in the Polish presidential election doesn’t help a unified European approach to geopolitical challenges. Even so, for now the outcome only has a (modestly) negative impact on the zloty (EUR/PLN 4.2675), not on the euro. Still, in this context of USD weakness, the yen outperforms the euro (USD/JPY 143 from 144.0, EUR/JPY 163.2 from 163.4). At the time of finishing this report, the US Manufacturing ISM prints at a weaker than expected 48.5 (from 48.7). Employment also remains in contraction territory at 47.6 (from 47.2). At the same time, price pressures remain elevated with prices paid holding at 69.4 from 69.8. In a first reaction, equities and the dollar declines accelerate. Yields ease off the intraday highs, but stay in positive territory.
 

EUR/USD: challenging the 1.1418 resistance, final hurdle on the way to the YTD top

Brent oil holds off recent lows. Markets ponder OPEC+(flexible) supply strategy going forward after raising output for July.

EUR/PLN: zloty limits damage even as presidential election outcome complicates relations with the EU.

S&P 500: hesitant start to the new month as trade (and capital) uncertainty lingers.