KBC Sunset Market Commentary 23/07/2025 via Trader Talent

Daily Market Overview

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Markets

•          The US-Japanese trade deal struck overnight lifted market sentiment, in Japan in the first place. Yields in the Asian country rallied with net daily changes varying between +4.8 (30-yr) to +8.8 bps (5-yr). The 40-yr yield was a bit of an exception in this otherwise bear flattening move, rising 8.5 bps in the wake of a poorly received auction. The – in all honesty ill-timed – sale took place days after the ruling coalition lost its majority in the Upper House last Sunday. That’s raising questions on the government’s survivability, particularly with rumours of PM Ishiba’s imminent resignation lingering. It also poses risks for an even looser fiscal policy since the LDP+Komeito coalition is now forced to compromise with fiscally less orthodox opposition parties, making the ultra long end of the curve particularly vulnerable. The yen initially suffered from these political and fiscal risks but recovered as trade deal optimism eventually took over. USD/JPY eased to 146.27 currently and EUR/JPY slid towards 171.6. Stocks in the country shot up 3.5%, bringing the Nikkei225 to less than 3% of its July 2024 record high.
•          The mood spilled over into European (and to a lesser extent US) dealings. The EuroStoxx50 adds about a 1%. That used to be a bit more before reports hit the wires of the Commission readying a $100bn US retaliation package in case there’s no trade deal made and the US pushes ahead with its 30% tariff threat. It doused some of the market hopes ignited by the Japanese trade story even though USTS Bessent in a Bloomberg interview didn’t sound all that negative. “Talks with the EU are going better than they had been.” Commerce Secretary Lutnick later added that Japan’s deal “could be” a model for Europe, referring to the $550bn investment fund pledge Japan made to buy off a lower tariff rate (15%) and accepting US standards on cars. Anyway, German/European yields are off their intraday highs for the same reason. They still add up to 2.3 bps at the long end though. US Treasuries slightly underperform Bunds but outperform gilts. It seems that whenever there’s the slightest pinch of public finance fears in the air, UK yields are taking the lead higher. They rise between 2.7 (2-yr) and 5.7 (30-yr) bps. Sterling isn’t hurt by it and ekes out a small gain against the euro (EUR/GBP 0.866). The common currency in a broader perspective is slightly under pressure against most other G10 peers, including USD. EUR/USD gives up half of yesterday’s rise to trade around 1.172. Cyclical currencies such as AUD and NZD are the notable outperformers today, rallying perhaps on reduced uncertainty after the first trade deal between two actual major economic powers.
 

News & Views

•           A study of Jürgen Mathess published on the website of the ‘Institut Der Deutschen Wirtschaft’ (IW) indicates that yuan undervaluation against the euro provides an unfair cost advantage for China. The study says that compared to 2020, the 2025 deficit in goods trade with China is 3.6 times higher for Germany and it has doubled for the euro area. The study said that the nominal exchange rate of the yuan against the euro hardly changed over that period while European goods have become much more expensive. Producer prices have risen by more than 35% in Germany and EMU compared with early 2020, whereas Chinese producer prices have hardly increased, resulting in a sharp real appreciation of the euro against the yuan. The huge cost disadvantage likely contributed considerably to the rise in the trade deficit. This large European cost disadvantage would have been prevented if the yuan had appreciated against the euro to a significant degree. However, as the yuan exchange rate is managed by the central bank of China, the study sees strong indications for currency manipulation and for a significant and unfair undervaluation even if other considerations (capital flows, services and primary income flows) are taken into account. The study comes as the EU and China will meet for a Summit in Beijing On Thursday.
•          Polish consumer sentiment deteriorated in July, both regarding the current and future situation, the country’s statistical office released today. The current indicator declined from -9 to -14 as all subcomponents deteriorated compared to last month. Polish consumers especially turned more negative on the possibility of making important increases and on the evaluation of the economic situation of the country. However, sentiment was unchanged compared to the same month last year. A similar picture was given for the forward looking confidence indicator. Still,  this indicator was slightly higher compared to the same month last year.

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