KBC Sunset Market Commentary 27/05/2025 via Trader Talent

KBC Sunset

Tuesday, May 27, 2025

Daily Market Overview

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Markets

• ECB’s Lagarde made a strong case yesterday when promoting a bigger, international role for the euro while that of the US dollar is gradually waning. Her long-term call needs to see the remaining stumbling blocks resolved first, including fragmented capital markets. It also means the short-term impact of an otherwise interesting speech is limited. The euro, in fact, is losing out against the dollar in a daily perspective. EUR/USD eased from an intraday high around 1.14 to 1.135. It’s not so much euro weakness as it is dollar strength though. USD/JPY rises to 144.07 while the trade-weighted DXY recovers to 99.35. The greenback is not the only US asset kicking of its first trading day of the week after having enjoyed the long weekend. They still had to catch up with Trump’s umpteenth U-turn on (European) tariffs. US Treasuries’ rally, for example, pushes yields between 1.4 and 5 bps lower. The long end of the curve outperformed in a move kickstarted by the Japanese bond surge during Asian dealings. Japanese bond yields dropped 20 bps (30-yr) after having hit multi-decade and in some cases record highs last week in maturities from 20-yr on. That happened after a miserable auction of that tenor. Fearing for tomorrow’s 40-yr bond auction, authorities started to sound out market participants on what the appropriate auction size would be. Reuters later reported the Ministry of Finance may trim its issuance of super-long bonds in response. European yields similarly drop a few bps at the back end of the curve. French inflation surprised to the downside, hitting a four-year low at 0.6% (0.9% expected). The miss came on the account of energy prices, which fell 1.5% m/m. But services prices eased as well, by a monthly 0.2%. Short-term yields barely budged. That’s not a huge surprise given that money markets are already pricing in a too low terminal ECB policy rate (<1.75%). A few more ECB members hit the wires before the 7-day quiet period kicks in from Thursday. Uberhawk Holzmann told the Financial Times that there’s no reason to lower rates in June or July. He argues for a pause until September to see how the trade conflict evolves. His comments contrast with most of his colleagues and indeed had little effect on market pricing for next week. A 25 bps rate cut remains fully priced in. UK gilts underperform global peers with the front end marching 5 bps higher and that’s actually masking an intraday 10 bps move. That’s supporting sterling and triggering a breach of EUR/GBP sub 0.84. European stocks extend yesterday’s gain by 0.4%. Wall Street opens more than 1% higher.

News & Views

• The European Commission’s economic sentiment indicator (EMU) improved from 93.8 to 94.8 in May, beating 94.1 consensus. The employment expectations indicator also picked up, from 96.5 to 97. Both indicators remain below their long term average of 100. The rise in the ESI for the EU was primarily driven by a partial rebound of confidence in the retail trade sector (recovery of retailers’ assessment of the past business situation and more favourable assessments of the volumes of stock) and among consumers (especially receding pessimism over general economic situation), with a moderate contribution also from the construction sector (improved assessments of the level of order books). Confidence in both the industry and services sectors remained broadly stable. Selling price expectations dropped in services, retail trade and construction but remain above their long term averages. Consumers’ price expectations for the next 12 months reverted the sharp increase from April, ending the upward trend in place since late 2024.

• The EU today approved the creation of a €150bn EU arms fund, the final legal step in setting up the SAFE (Security Action for Europe) scheme, involving joint EU borrowing to give loans to European countries for joint defense projects. For a project to qualify for SAFE funding, 65% of its value must come from companies based in the EU, Ukraine, Iceland, Liechtenstein, Norway and Switzerland. Companies from countries with a Security and Defense Partnership with the EU (eg UK) can also be eligible under additional conditions. The contribution of any single non-EU subcontractor in any funded project is capped at 15% but can rise to 35% under circumstance.