European stock markets lose key support
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Global core bonds ended mixed on Friday with German Bunds outperforming US Treasuries. Risk sentiment on stock markets remained fragile, especially in Europe. The German Dax closed the week below key support (11.726; 38% retracement from 2016-2018 rally and neckline triple top), suggesting that the downside isn’t exhausted yet. German yields dropped 1.3 bps (30-yr) to 2.7 bps (5-yr). Daily changes on the US yield curve varied between +0.4 bps (2-yr) and +1.2 bps (10-yr). 10-yr peripheral yield spread changes vs Germany widened 3 to 5 bps with Greece (-7 bps) outperforming. Portugal regain investment grade by Moody’s after Friday’s market close. The rating agency argued that the country’s elevated general government debt has moved to a sustainable, albeit gradual, downward trend with limited risks of reversal. Additionally, Portugal’s growth drivers have broadened with a structural improvement of the external position which has increased economic resilience. Portuguese bonds are expected to outperform today on peripheral bond markets.”
Asian stock markets lose ground overnight despite WS’s decent performance. The US Note future is a tad higher. ECB Villeroy stated the obvious by saying that the central bank will bring more clarity on the start of the tightening cycle by the summer of next year. ECB President Draghi warned that the key threat facing the economy is a jump in interest rates. Bavarian elections ended with a defeat for Merkel’s coalition partner CSU. We expect a stronger opening for the Bund, also taking into account stalled brexit talks and hawkish trade rhetoric by US president Trump against China.
Today’s eco calendar contains US retail sales and empire manufacturing business sentiment. Consensus expects a 0.6% M/M increase for the headline retail sales and +0.4% M/M for the core reading. Even if this bar is already rather high, we still see risks for an upward surprise. The question is whether it will filter through to markets. We fear so. Risk sentiment on stock markets will again be key. Technical charts suggest more losses, especially in Europe. The Bund profited at the end of last week, but its performance could have been better given circumstances, especially when adding the decline of oil prices. So, we start the week with a positive bias on the back of fragile risk sentiment, but add that core bonds only profited marginally last week.
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