Fake news causes volatility
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Fake news causes volatility
The US Note future traded very volatile yesterday whereas the Bund was an island of tranquility, whipsawing around opening levels. The sell-off of the US Note future continued in European dealings on reports that China would contemplate halting or slowing US Treasury purchases from its FX reserves (bear steepening). The Note future bottomed out at the start of US trading only to start an intraday comeback after a stellar 10-yr Note auction. The Note future attracted even more buyers overnight after China officially labelled yesterday's report as "fake news" (bull flattening).
Changes on the US yield curve were eventually minimal on a daily basis, ranging between -0.2 bps (5-yr) and +0.4 bps (10-yr). The German yield curve steepened marginally with yield changes varying between -0.1 bp (2-yr) and +0.7 bps (30-yr). 10-yr yield spreads versus Germany ended narrowly mixed.
Most Asian stock markets lose some ground overnight in line with WS's first negative close of this year yesterday evening. Brent crude continues trading near the highs, north of $69/barrel. Strength in the US Note future isn't expected to filter through in the Bund opening.
Today's eco calendar becomes more interesting with US producer prices. They have market moving potential in the current volatile US Treasury market. Consensus expects modest 0.2% M/M increases for both headline and core readings. We think that especially higher PPI data won't go unnoticed since the US 10-yr yield's technical break above 2.5% earlier this week (bearish signal US Treasuries). The technical break suggests a move to 2.63%/2.64%. A speech by NY Fed Dudley lost appeal since he announced at the end of last year to be retiring mid-2018. The US 30-yr Bond auction could limit any intraday losses. In line with yesterday's 10-yr Note auction, we expect some investors already to be lured by the higher absolute yields.
German trade union negotiations about pay rises are expected to conclude today and can influence trading. German wages are expected to be pivotal to start an upward spiral in EMU price dynamics and could be a bearish signal for Bunds. Minutes of the ECB's December policy meeting are today's second interesting EMU item, especially if they would elaborate on the debate of forward guidance. Several German-Franco ECB members already expressed uneasy with the possibility to lengthen APP beyond September if necessary. MT, we expect the German 10-yr yield to rise towards 0.62%. Strong global growth and the global push to monetary normalisation are bearish factors for bonds.
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