Sunset Market Commentary

Markets

The core bond yield rally dwindled in European morning trading. Yields were even down a few bps before finding a bottom already around noon. Rates were more or less flat when European investors met their first US colleagues. After that, the intraday upleg gathered a bit more steam. Current changes in the US vary between 1.6-2.8 bps with the wings slightly underperforming the belly of the curve. German yields rise 2.7-4.4 bps with the front underperforming. Markets now gradually turn to the national and European inflation figures tomorrow and Friday to support the next move higher in yields. Headline inflation is expected to ease materially on the account of energy prices (from 8.5% to 7.1%). Monthly dynamics are still expected at a very strong 1.1% m/m, suggesting ongoing broad and strong price pressures. In addition, ECB’s Kazimir today said that core inflation is key in taking rate decisions, and that gauge is still seen accelerating to a new record high (5.7%). He sees a real risk banks will curb lending but added that this shouldn’t refrain the central bank from lifting rates further, be it perhaps at a slower pace. Chief economist Lane in a speech later said more hikes are needed under the baseline scenario. An all in all, the orderly yield rise doesn’t hamper stocks today. The Euro Stoxx 50 bounces 1.4% higher, extrapolating upbeat Asian/Chinese (tech) sentiment into Europe. The index is on track for a close beyond the recent highs just north of 4200. US stocks open with gains between 0.7-1.3%. Other risky assets including commodities join the risk on. Brent oil adds >1% to $79.53 – the highest in two weeks.

Japan’s yen is being targeted on the currency markets today. Risk on and rising core bond yields weigh on the yen, lifting USD/JPY from 130.89 to 132.49 currently. EUR/JPY surges almost two big figures from 141.94 to 143.82. The euro forfeited a slight advantage it had over the dollar. EUR/USD is currently changing at a slightly lower rate of 1.084 today. On a trade-weighted basis, the greenback isn’t going anywhere (DXY unchanged at 102.54). Sterling continues its counterintuitive trading pattern. Risk-on and gilt underperformance do not suffice for the pound. EUR/GBP trades back above 0.88. trading in the pair is extremely muted though. The low-to-high over the past 14 days spanned less than 1.5 big figures.

News & Views

The Flemish community raised €1.25bn via a new 10y benchmark (Apr2033). Earlier this year, Flanders started a short term Belgian Commercial Paper programme, issuing a €1.5bn 3-month bill mid-January which we expect to be roll-overed. Today’s bond was priced to yield MS + 41 bps over the Belgian OLO-curve, compared to initial price takings at MS +45 bps area and revised guidance at MS +43 bps. Total books went above €3.5bn. Flanders Department of Finance estimates total new funding needs for 2023 at roughly €6bn. Debt redemptions for 2023 are projected at a mere €0.07bn. The deficit is expected around €2bn this year, before declining to around €1bn in 2024 & 2025. Other (recurring) funding needs come from the Flemish Social Housing Company (VMSW €0.58bn), the Flemish Housing Fund (VWF €1.14bn) and costs related to the Oosterweel link (LANTIS; €0.4bn). The multiyear €4.3bn recovery plan (Flemish Resilience) accounts for €0.77bn in 2023. Total net funding needs are forecasted to decline from €3.86bn in 2024 to €2.3bn.

The Bank of England published the summary and record of its quarterly Financial Policy Committee meeting (March). The FPC closely monitored the problems facing SVB, Credit Suisse and judges that the UK banking system remains resilient (well-capitalized, large liquid asset buffers). Tighter financial conditions continue to weigh on the ability of households, businesses and governments globally to service their debts, with the full impact taking time to feed through for many borrowers. Riskier corporate borrowing in financial markets is likely to be particularly vulnerable to tighter financial conditions. In aggregate, the global high-yield bond, leveraged loan and private credit markets have almost doubled in size over the past decade.