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

KBC Sunset

Tuesday, March 4, 2025

Daily Market Overview

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Markets

• There’s little left from yesterday’s (European) stock market optimism. US President Trump personally pulled the EuroStoxx50 off an all-time high by pausing all US military aid to Ukraine until he is convinced about Ukrainian president Zelensky’s intentions toward peace negotiations with Russia. The White House didn’t specify any conditions for the US to resume its military aid. The EU was already on a fast-track towards increased defense spending after Friday’s collapsed talks between Trump and Zelensky with EC von der Leyen speeding up to timeline further today ahead of Thursday’s EU Council dedicated to defense and Ukraine. She today proposed a Rearm Europe Plan. In a letter to EU leaders, she outlines five potential measures to massively boost defense spending, both to respond to the short-term urgency to act and to support Ukraine, but also to address the long-term need to take on more responsibility for our own European security. They include a new €150bn loan instrument to finance joint defense investments and €650bn from individual member states increasing defense spending by 1.5% of GDP on average and for which fiscal discipline rules will be once again lifted. Von der Leyen’s press conference unfortunately failed to lift market spirits. Party pooper Trump’s second folly came from pushing through with 25% tariffs against Canada and Mexico and raising the level for China from 10% to 20%. China and Canada immediately retaliated with Mexico joining on Sunday. The escalation extends market worries that the Tariff Man will in the short term raise inflationary pressures and in the mid-to-long run pull the US economy into recession. Prepare for more fireworks tonight as he addresses a joint session of US Congress for a first time in his second term. Today’s empty eco calendar and lack of central bank talk left markets vulnerable to this explosive geopolitical situation. Key European indices lost 2.5% on average. The front end of European bond curves outperforms as investors pour back into ECB April rate cut bets. Front end yields lose around 5 bps. The (very) long end trades flat given the avalanche of fiscal stimulus ahead of us. The dollar remains vulnerable to the US recession narrative with EUR/USD taking out the previous YTD top at 1.0533 and testing 38% retracement (1.0551) on the September to February decline in EUR/USD. US Treasury yields cede up to 6 bps at the front end with US money markets again fully discounting three additional 25 bps Fed rate cuts this year. Oil prices extend their drop after yesterday’s surprise OPEC+ production cut reversal announcement with Brent crude testing $70/b support.
• The Kingdom of Belgium launched a now long 15y OLO via syndication (Jun2042). Order books ended above €37bn, allowing the debt agency to print €5bn at 8 bps over the Belgian OLO curve compared with guidance in the OLO + 10 bps area. They now raised €16.39bn YtD compared with a €42bn OLO funding need to cover the lion share of the €44.65bn gross borrowing requirement. One final syndicated deal (5y) is expected later this year.

News & Views

• The Hungarian central bank’s new leadership sees no room to cut policy rates from the current 6.5%, Bloomberg reported today citing sources. Mihaly Varga, the former finance minister to prime minister Orban, took over from Gyorgy Matolcsy starting today. Varga himself in his first comments to Bloomberg said “The central bank supports sustainable economic growth by keeping inflation sustainably low and by guarding financial-market stability”. According to the people tapped by the news agency this translates into an even longer rates status quo, adding that he is committed to tackle inflation and doesn’t plan to conduct monetary policy in such a way that it would weaken the forint. Hungarian inflation rose to a 13-month high of 5.5% in January, well above the central bank’s 3% target. The Hungarian forint briefly strengthened to the highest level against the euro since early October. EUR/HUF remains near the 400 support barrier though. Hungarian swap rates swapped earlier losses for 3 bps gains.
• The Japanese yen trades strong today. USD/JPY broke below 150 yesterday and extends losses to the lowest level since October of last year. Aside from the current risk-off, it was US President Trump who sparked the recent two-day JPY appreciation with his first comments since taking office on Japan. He accused the country of having an unfair advantage through its FX policy. Trump said something similar about the Chinese yuan. Believing the Chinese authorities will either partially or fully comply to Trump’s demands (of a stronger FX) or face tariffs otherwise, it helps explain today’s CNY strengthening even as the US just slapped the country with a 20% levy.