The new week starts with an uneventful eco calendar

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On Friday calm returned on markets. Equities reversed part of this week’s losses which allows core bonds to further shrug off overbought conditions. More dovish Fed comments didn’t help bonds. Following (unexpectedly) soft talk by Fed Williams (“QE needed if economy falters”) and Fed Bullard (“delay end QE”), also dovish Boston Fed governor Rosengren said that QE-4 should be considered if the economy weakens. On intra-EMU bond markets, Thursday’s spread widening was undone for the PIIGS, while core spreads only narrowed 1 bps. After two volatile sessions, trading ranges for core bonds were rather small. At the end of the session, the German yield curve bear steepened with yields flat (2-yr) to 5.6 bps (30-yr) higher. In the US, yield changes varied between +2.8 bps (2-yr) and +3.8 bps (10-yr).

The new week starts with an uneventful eco calendar as only Italian industrial orders and sales and Belgian consumer confidence will be released. Slovakia (Bonds) and Belgium (OLO) will tap the market and ECB’s Coeure is scheduled to speak. Later this week, we eye EMU PMI’s, US CPI and UK/Chinese GDP data.
After last week’s turmoil, it will be interesting to see whether or not they darken expectations about the global economy/inflation. Regarding central bankers, the Fed governors are restrained to the black period ahead of the next FOMC meeting (Oct 29). Also ECB governors remain rather quiet perhaps as next weekend the results of the Asset Quality Review (AQR) will be published. The run-up to the release might trigger quite some uncertainty on the outcome. How many banks failed? Which ones? Is there a “heavyweight” in trouble? …

The Belgian debt agency kicks off this week’s EMU bond supply by tapping the on the run 10-yr OLO 72 (2.60% Jun2024), the off the run 30-yr OLO 60 (4.25% Mar2041) and the on the run 30-yr OLO 71 (3.75% Jun2045). The amount on offer is relatively low, €1.5-2B. Normally, this will be the second to last OLO auction of the year with a final (small) one on November 17. Currently, the Kingdom of Belgium raised 91% of this year’s funding need. In the run-up to the auction, the bonds cheapened 10 (OLO 72) to 14 bps (OLO 60) in ASW spread terms. The bonds trade normal on the OLO curve and this part (long end) of the yield curve still offers some pick-up over France. Overall, we don’t expect difficulties for the auction. Tomorrow, the Finnish treasury taps the on the run 15-yr RFGB (2.75% Jul2028). On Wednesday, the German Finanzagentur sells the on the run 30-yr Bund (€2B Aug2046). This week’s auctions will be supported by a €11B Austrian redemption and a €21B French OAT redemption.

Overnight, Asian equities trade positive though gains are more modest than in Europe and the US on Friday. Japanese stocks outperform on the back of a weaker yen. The FT also reports that Abe weighs delaying a sales tax hike. Apart from that, there were again rumours on Friday that the PBOC would inject liquidity into national/regional lenders to boost the economy. In the WSJ, Fed watcher Hilsenrath argues that the Fed is highly likely to end its bond-buying programme next week amid recent mixed messages from Fed governors (see above). The US Note future opened lower, suggesting that also the Bund could start the day on a weaker footing.

Today, the eco calendar is empty. ECB’s Coeure speaks but he shared his views last Friday as well. The ECB board member said amongst others that the ECB is committed to take additional measures if needed and that they will start within days to buy assets. Q3 earnings remain a wildcard but today’s heavyweight (Apple) only releases results after market. Therefore, we could see a slow start to the trading week. Equity market sentiment remains important. Last week, dark expectations about the global economy/inflation and fears that monetary policy reached its limits increased market volatility. European/US equities fell below key support levels and couldn’t regain these technical levels (1904 for S&P 8900/9000 for Dax). Core bonds profit from weak equity markets whereas this relationship isn’t very strong in the opposite direction. The technical picture is still bullish for bonds. For the German Bund, the uptrend line since June gives support at 150.29.