Event risk looms large
|Rates
Global core bonds gained some additional ground last Friday with German Bunds outperforming US Treasuries. The upleg in the Bund correlated with weakness in the Italian BTP future. Italian BTP’s weathered a storm last week following the EC’s significant growth downgrades. They suggest that a new standoff on the budget is possible. Regional elections in Abruzzo this weekend will probably show that Salvini’s popularity is widening beyond Northern-Italy, amplifying rumours that he should call early elections to bank on his success, ditch the 5SM-party and form a centre-right government. Stock markets drifted south last Friday with US indices sprinting to flat outcome in the final trading hour. The German yield curve bull flattened with yield ending up to 3.1 bps lower (30-yr). The US yield curve shifted in similar fashion with yields dropping by 1.4 bps to 2.2 bps. 10-yr yield spreads vs Germany widened slightly with Greece (+5 bps) and Italy (+4 bps) underperforming.
Asian stock markets are mixed this morning. China outperforms, returning from a week-long holiday. Japanese markets are closed (National Foundation Day). The US and China started a fresh round of trade talks in Beijing and are rumored to prepare for a March Summit between presidents Trump and Xi Jinping. Chinese state media run a story that the Chinese economy may continue to be under pressure this year. They expected Q1 2019 GDP growth to dip to 6% with a conservative full year estimate of 6.3%. The German Bund and US Note future tread water.
Today’s eco calendar is empty. Speeches by ECB vice-president de Guindos and Fed Bowman are wildcards. Event risk looms large again this week with US-Sino trade talks, the US Congress stand-off on border funding (Feb 15 deadline) and a new parliamentary brexit vote (Feb 14) A catch-up of US eco data and an avalanche of Fed speakers can colour trading as well. Risk sentiment will remain today’s key driver. There are no indications of an amelioration, suggesting core bonds might remain in demand with peripherals facing more pressure. The Italian 10-yr yield tests first resistance at 3%. The German 10-yr yield fell through the lower bound of the 0.15%-0.31%, suggesting a return to the psychological 0% mark or even to negative levels. The 5y5y EMU inflation forward swap rate fell below 1.5%, boosting disinflationary/deflationary worries. The US 10-yr yield slides lower in the 2.49%-2.78% trading channel. The Fed’s January communication probably implies an intention to stand pat at least until, and likely beyond, June.
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