Sentiment remains bullish despite some profit taking

Rates

Global trading was interrupted on Friday by a worldwide Bloomberg outage from the European start until European noon. In the meantime, March EMU inflation was confirmed at -0.1% Y/Y. As Bloomberg terminals got up and running again, equities immediately continued Thursday’s correction lower, supporting core bonds. It’s unclear whether or not the outage had something to do with it (accumulation unfilled orders). At least even important to explain the sudden crash of stocks was news from China. Chinese equity futures seemed to trigger the charge lower after regulators clamped down on the use of shadow financing for equity purchases and increased the supply of shares available for short sellers. Anyway, for the Bund risk-off sentiment meant new highs and a new low for the German 10-yr yield (5 bps). During US dealings, core bonds came off the highs with US treasuries underperforming following a higher than expected core CPI reading. The Bund slightly shrugged off overbought conditions as investors took some profit after a juicy week. In a daily perspective, German yields dropped less than 1 bp, while the US curve flattened with yield changes ranging between +2.4 bps (2-yr) and -5.6 bps (30-yr).

Thin calendar, looking to stock market for clues?

The eco calendar is empty today. The ECB announces the amount of assets purchased and ECB’s Constancio speaks at the European Parliament in Brussels. Later this week, the eco data flow remains meagre with Existing Home sales (Wednesday), claims, New Home sales (Thursday) and durables (Friday) in the US. The Fed’s black period kicks in, meaning no Fed speakers this week. In EMU, the calendar is more interesting with the preliminary PMI business services on Wednesday, German ZEW on Tuesday and IFO on Friday. On Friday, there is also the Eurogroup meeting, but hopes on a Greek deal have faded. The May 11 Eurogroup meeting is the crucial date for a possible deal. In the weekend, Greek Ministers remained defiant as creditors up pressure for a deal. The Greek Vice PM repeated the red lines: no cut of wages or pensions, no new taxes and no selling of assets. Draghi urged Greece to work quickly. While he said the EMU is now more robust to cope with a Grexit, he also warned that a new Greek crisis would mark unchartered waters. ECB Noyer said that ELA will have to end eventually, as it is no substitute for LT actions, but the Greek FM thought it could last until the summer. Besides these data and events, the earnings season will be in full swing. Friday’s sell-off of equities is a warning and the lowering of the reserve requirement by the Chinese PBOC got only a tepid response. So, equities may be an important driver this week.

OLO auction should go smoothly

The Belgian debt agency holds this week’s only scheduled EMU bond auction by tapping the off the run 10-yr OLO 58 (3.75% Sep2020) and the on the run 10-yr OLO 74 (0.80% Jun2025) for a combined amount of €2-2.8B. Both bonds cheapened around 5 bps in ASW-spread terms going into the auction. OLO 58 trades relatively rich on the Belgian curve while OLO 74 is a tad cheap.
Year-to-date, Belgium raised 38% of this year’s total funding need. Overall we don’t expect difficulties for today’s tap. It could find some additional support from a €21.87B French redemption.

Today’s Strategy

Overnight, Asian equity indices drop around 0.5% which is rather modest compared with Europe/US on Friday. China disappoint (flat) after the PBOC cut the required reserve ratio for all banks by 100 bps. The US Note future trades marginally higher.
Today’s EMU eco calendar is empty. Current market themes (elevated risk of ST Greek default, dovish ECB stance, delay FOMC lift-off, stock market correction) and the bullish technical picture suggest even more gains for the Bund. However, as we’ve entered overbought conditions, a short term profit taking move is always possible. There are no signs that a downward correction will go far though. The US calendar is empty as well. Sentiment on stock markets could be the most important driver for US Treasuries. If the downward correction continues, the US Note future could eke out more gains. Technically, the US 10-yr yield approaches 1.82% support.