KBC Sunset Market Commentary 27/08/2025 via Trader Talent

Daily Market Overview

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Markets

•          French yields remained at the center of attention. Since prime minister Bayrou called a budget-related confidence vote for September 8, OATs have underperformed not only vs. Bund & swap but even vs. Italian BTPs. That continued today, be it at a less alarming pace than on Monday. Some French tenors including the 5-year one already trade higher than their Italian counterparts and the gap between the important 10-year references is narrowing to just 5.5 bps, the narrowest since the early days of the monetary union. The OAT-swapspread surpasses 85 bps, which is the highest since March of this year. French equities were offered some relief after a two-day beating. The CAC40 adds 0.6%, beating its European peers (eg. EuroStoxx50 flat). The political instability theme meanwhile appears contagious and is spreading to the Netherlands as well. A motion of no confidence was filed today. But there is no clear procedure in place on how a minority caretaker government has to handle defeat. The four-party coalition government broke down in June after Wilder’s Freedom Party left and crumbled to just two parties with the exit of the New Social Contract party last week. The current coalition only has 32 seats of the 150. Dutch bonds react stoic though. Spreads vs swap hold steady. The US yield curve steepens further with losses of 3 bps at the front complemented by another 3 bps rise at the ultralong end. The 30-year tenor (4.95%) is marching towards the 5% barrier again. It suggests lingering concerns on the topic of Fed (political) independence. The dollar nevertheless has the upper hand against a weak euro. EUR/USD pushes further south, breaking below the 1.16 big figure. Nothing changed from a technical point of view though. The trade-weighted DXY dollar index inches higher to 98.61. UK gilt yields shot up at their first trading day yesterday amid the same fiscal worries that haunt French bonds and were given some reprieve at first today. But an intraday decline at the long end of more than 5 bps got virtually fully wiped out again as the session evolved. Sterling for the time being manages to capitalize on the poor euro momentum, dragging EUR/GBP marginally lower to 0.8625. Some final market moving events today include a $70bn 5-year bond sale as well as tech-heavyweight Nvidia’s earnings, released after-market.
 

News & Views

•          In an interview with the Newspaper L’Agefi, the vice governor of the Swiss National Bank (SNB), Antoine Martin, indicated that the bar for the SNB to cut interest rates into negative territory is rather high. ‘It should be noted that the requirement level for introducing negative rates is higher than it is for cutting interest rates in positive territory’, the SNB vice governor was quoted. Past experience showed that ‘negative rates have worked, but that they create more challenges for banks, investors and also households, which take more risks. This phenomenon can have long-term negative effects’. The SNB at its June policy meeting reduced its policy rate to 0% from 0.25%. Inflation in July rose from 0.1% Y/Y to 0.2I% Y/Y. In its forecasts the Bank even sees a jump in inflation in the coming quarters. The next regular SNB policy meeting is scheduled for September 25. The SNB vice governor saw recent weakness of the Swiss franc against the dollar mainly as USD weakness rather than franc strength will no dramatic effect on inflation. The franc over the previous day’s gained modest traction also against the euro (political risks in France and debate on Fed independence in the US). EUR/CHF moves to the 0.9355 area. Markets will also keep a close eye at the composition of the SNB balance (diversification USD-euro).

•          The Confederation of British industry (CBI) today published its June distributive traders report. Retail sales volumes fell at a strong pace in the year to August, extending the downturn to an eleventh consecutive month. CBI analyses that weak demand and gloomy sentiment continue to weigh on retailers’ investment and hiring plans. Price pressures remain elevated. The balance of retail sales volumes in the survey declined to -34 from -32. Sales are expected to decline at slower pace in September (-16). Retail sales for the time of year were judged to be “poor” to a somewhat greater extent than in July (-19  from -10). Next month’s sales are set to remain below seasonal norms to a similar degree (-20%). Sentiment among retailers remained poor, with the business situation expected to deteriorate over the coming quarter. Employment continues to decline and is even expected to decline at a slightly faster pace next month. Retail selling price rose in the year to August at the fastest rate since November 2023 (+65 from +35 in May).
 

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