KBC Sunset Market Commentary 25/06/2025 via Trader Talent

KBC Sunset

Wednesday, June 25, 2025

Daily Market Overview

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Markets

• Today’s NATO summit in the Netherlands should have been all about member nations stepping up efforts on defense spending. They effectively agreed to meet the US demand to target 5% of GDP by 2035. Instead, all questions went US President Trump’s way. A leaked, preliminary, intelligence report produced by the Defense Intelligence Agency suggested that the US airstrikes only set Iran’s nuclear progress back for about six months. Trump countered those rumours, talking about total obliteration and indicating that more detailed reports will come shortly. The NATO headlines equally proved the lack of other news in financial markets. Empty eco calendars on both sides of the Atlantic are testament to that. Bear steepening continued on European bond markets after German cabinet yesterday approved the expansionary multi-year budget which will result in net new debt issuance in excess of €500bn between this year and 2029. Higher term premia push long end bond yields higher. Daily changes in Germany today range between +1 bp (2-yr) and +4 bps (30-yr). The 30-yr yield sets a month-to-date high at 3.06% and shows tentative technical signs of heading to the YtD top above 3.20%. The long end of the US curve underperforms as well (+3 bps) with US Senate racing to get their version of Trump’s big beautiful bill voted in order to keep the self-imposed 4th of July deadline in alive. Succeeding implies putting US finances on an even more unsustainable path going forward and will again result in higher term/credit risk premia. Unlike in Europe, the steepening in the US is also driven by an outperformance of the front end of the curve after Fed Chair Powell for the first time emphasized the possibility of earlier rates cuts in case of a weakening labour market or modest impact from tariffs. July is ruled out, but September seriously comes into play. The subtle change of tone suggests asymmetric risks for next week’s US eco data update including ISM’s, ADP employment change and of course payrolls with markets (ST US bond yields & US dollar) especially sensitive to weaker numbers. EUR/USD is taking a breather at 1.16 today, but the technical picture suggests a continuation of the buy-the-dip pattern in place since the German fiscal U-turn early March.

News & Views

• One in three central banks plan to increase gold holdings in the next one to two years after already having accumulated the bullion at breakneck pace, the Official Monetary and Financial Institutions Forum (OMFIF) said in a report. 40% of the 75 central bank’s surveyed plans to raise holdings over the next decade. The OMFIF found that 70% was discouraged in investing in the dollar due to the US political environment, though the vast majority (80%) still see the greenback as offering safety and liquidity. It nevertheless dropped from first place to seventh in terms of popularity as central banks are diversifying away from the currency. The euro was the most in demand with a next 16% planning to increase holdings over the next one to two years. That’s up from 7% last year. Over the next decade, however, the Chinese yuan is more favoured with a net 30% expecting to increase their holdings.

• France appears to be leaving behind a period of relative political calm. Negotiations over a retirement reform have collapsed after four months. The 2023 reform amongst others included a raise in the minimum retirement age to 64 from 62. Some leftist lawmakers in return for their support in the minority government’s 2025 budget in February demanded some aspects of the 2023 law to be revised. The leftist parties including the Socialist Party have now proposed a vote of no confidence to topple the government. But this requires the support of the far-right National Rally, something it said it won’t give. Instead, the RN is preparing for a different battle: public finances. The French government led by PM Bayrou is due to present the main points of the 2026 budget by mid-July before formally presenting it in October. RN party leader Bardella last week said this finance bill will be “the moment of truth for censure.” Another RN lawmaker, Jean-Philippe Tanguy, today said that the party would seek to topple the government if Bayrou goes ahead with certain tax increases and spending cuts.