Bad ISM gives huge push in US T’s back
|US tech giant Apple’ revenue warning, blaming cooling Chinese demand, determined Asian dealings and the start of European trading. Risk aversion was name of the game with JPY, gold and (to a lesser extent) core bonds rallying.
Tensions eased during European trading hours, suggesting that the breathtaking core bond rally, which started early November and lasted through the end of 2018, might finally lose some steam. The uptick in the oil price (Brent > $56/barrel) in this respect played a role as well, given the strong correlation between the collapse of oil, declining inflation expectations and lower (long term) yields we have witnessed. Technically, the German 10-yr yield bounced off final support (0.15%; 2017 low) before returning to (sub)-zero levels. Any hopes of peace on global markets were nipped in the bud by a dismal December US manufacturing ISM, dropping from 59.3 to 54.1 (vs 57.5 forecast). It put all risk-off trades back on and caused a significant outperformance of US Treasuries vs German Bunds. US yield declined by 10 bps (5-yr) to 4.9 bps (30-yr). The outperformance of the front end (2-yr yield -9 bps) indicates that investors’ start discounting that the Fed’s next move will be a rate cut. Changes on the German yield curve varied between +0.3 bps (wings) and -1.5 bps (belly). Peripheral yield spread changes vs Germany widened by 2 bps (Ireland) to 7 bps (Portugal) with Italy underperforming (+18 bps). There was no political news, but investors probably get nervous ahead of first Italian supply operations. The Italian debt agency might soon want to prove its access to long-term funding (10-yr+?) via (syndicated?) deals.
Risk sentiment improved again overnight. News that China and the US will meet early next week in Beijing to discuss a trade truce lifted stock markets and weighed on core bonds. China outperforms, additionally helped by a stronger services PMI and hints on monetary and fiscal support by the Chinese PM. Japanese markets are notable underperformers, but still had some catching up to do, returning from NY holidays. Today’s eco calendar heats up with EMU inflation (core: 0.9% Y/Y and headline 1.7% Y/Y; downside risks) and US payrolls (+184k; upside risks). Markets are currently most concerned about the shape of the US economy with activity data probably taking over from inflation numbers as main market driver. EMU CPI readings might therefore be ignored even in case of weakness. On top, European markets are already positioned extremely dovish as well, only discounting positive 3M Euribor rates by mid-2021! A positive payroll surprise, the overnight improvement in risk sentiment and upward pressure on oil prices might therefore determine today’s global trading, providing some space for profit taking on the stretched core bond rally. Speeches by Fed members (Powell, Bostic and Barkin) are wildcards.
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