KBC Sunset Market Commentary 03/04/2025 via Trader Talent

KBC Sunset

Thursday, April 3, 2025

Daily Market Overview

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Markets

• Yesterday, optimists still hoped that the announcement of reciprocal US tariffs could bring some bad news, but at least also some clarity, providing a new reference framework. Even a worst case economic scenario could in this respect have helped find risk markets looking for a bottom. It’s a pity, but this proved to be the wrong assessment. Persistent uncertainty more than ever remains an integral part of the Trump roadmap. Announced tariffs only serve as a ‘friends price’ (halve what the US sees as the effective damage) and can be raised if trading partners retaliate (as e.g. China and the EU are preparing) and/or if negotiations fail. In addition, the tariffs for sure are higher than most expected, resulting in higher than feared economic damage both for the US and for its trading partners. An outright further risk sell-off was inevitable. Asian equity losses varied widely across markets (e.g. Nikkei -2.75%, China CSI 300 ‘only’ -0.59%). European equities opened with losses of about 2%, but after a brief pause deepened losses going into the US open (Eurostoxx currently -3%). The Nasdaq opened 4.5 % lower. For the US, stagflation risks are mounting sharply. For trading partners, risks might be more axed to growth. Bond markets clearly focused on the growth risks. Yields decline sharply with curves bull steepening. US yields decline between 17 bps (5-y) and 5 bps (30-y). Markets are discounting a 90% chance of a next Fed rate cut in June and a cumulative easing of 75+ bps this year. The 10-y yield fell below the 4% barrier for the first time since October. This implies the Fed giving up its primary focus on inflation. For now, there was no sign of the Fed amending its wait-and-see approach yet. Powell in a speech scheduled tomorrow might (or might not) provide some guidance on the Fed’s reaction function. German yields (off the intraday lows) decline between 11 bps (2 and 5-y) and 3 bps (30-y). Understandably, the March focus on a fiscally driven EU reflation evaporates further. Still we keep the idea in the back of our mind as a further fiscal response might still resurface. Spain announcing €14,1bn in aid to address the fall-out of the tariffs serves as a point in case. The country also advocates a similar initiative at a European level. Fiscal risk premia to return at some point?
• On FX markets, a US stagflation narrative, underperformance of US assets, further loss of confidence in (the predictability of) US institutions and the Trump government for sure being happy with a weaker dollar all contribute to a broad-based USD sell-off. DXY tumbled from a 103.8 close yesterday to currently 101.6. Key support at 100.15/99.58 (2024/23 low) is approaching fast. EUR/USD jumps from 1.085 to 1.1125, with the 2024 top (1.1214) serving as next target. Cable also cleared the 1.3015 YTD top but despite a ‘mild’ UK 10% tariff, sterling isn’t able to match the euro’s performance. EUR/GBP almost gains a full big figure (0.8435). USD/JPY is falling off a cliff (145.6 from 149.25). The yen and the euro, admittedly in volatile intraday trading, are keeping each other in balance (EUR/JPY 161.75).

News & Views

• Swiss inflation unexpectedly steadied in March. A flat monthly pace resulted in a 0.3% y/y print, equaling the February outcome compared to the 0.4% consensus forecast. Core inflation rose by the expected 0.9% y/y. The slight CPI miss had a near-negligible impact on the Swiss franc with the dominating theme today being trade-related risk off. The fallout for EUR/CHF (0.953) remains contained though. Swiss National Bank board member Tschudin was the first to comment on the US tariffs announced yesterday, saying the 31% slap was higher than anticipated. Based on calculations made by Switzerland’s State Secretariat for Economic Affairs, it could end up in a 1 ppt GDP hit. The SNB in March lowered the policy rate to 0.25% and money markets consider the possibility of another cut later this year. Tschudin refrained from commenting on the likelihood of returning to negative rates.
• OPEC+ agreed to a larger than expected output hike next month and plan to add 411k barrels a day. That’s three times the 138k boost that kicked in this month, which was the first rollback of the production curbs in place for several years now. Delegates said it is intended to put pressure on members of the cartel that have been exceeding their production quotas as bigger supply forces the prices to go down. Brent oil, which was already slipping over tariff-triggered growth concerns, extended its daily slide on the news to $70.6/b. Since Trump’s presser yesterday, Brent stumbled almost 6%.