Investors willing to buy into yesterday’s risk rally?
|Rates Global core bonds gained ground yesterday with US Treasuries outperforming German Bunds. Core bonds climbed higher throughout the biggest part of European trading. Stock markets failed to cling to opening gains and US eco data (April retail sales and industrial production data) were weak. Intraday bond profits melted away as Bloomberg suggested that US president Trump would delay his decision whether or not to impose auto tariffs by 6 months. Those tariffs could have escalated trade tensions with the EU and Japan as well. Stocks turned losses into gains. The US yield curve edged lower with changes in the range of -2.9 bps (30-yr) and -4.0 bps (5-yr). The German yield curve bull flattened with losses up to -3.9 bps (30-yr). Peripheral spreads over the German 10-yr yield, who touched its lowest level since 2016, widened with Italy (+5 bps) underperforming on new fiscal debauchery.
Sentiment is mixed across Asia. While granting the EU and Japan respite, president Trump is ramping up the pressure with China. This morning, he signed an order that's expected to restrict Chinese telecommunication companies (Huawei) from selling equipment in the US and forbidding them from doing business with US companies. Core bonds opened neutral, but are eager to uphold their upward tendency.
The trade story could shift to the background with the EU and Japan probably (still rumours) temporarily excluded from Trump's trade crusade. We wait and see whether investors are willing to buy into yesterday's risk rally against a background of deteriorating eco data. If so - we aren't convinced - it could temporary top gains for core bonds. Today's eco calendar contains second tier US eco data including housing starts, building permits, weekly jobless claims and the Philly Fed Business Outlook. Speeches by Fed's Quarles, Kashkari, Brainard and ECB's Praet, Weidmann, de Guindos and Coeuré are wildcards.
Long term view: markets concluded that the ECB missed out on this cycle. They even start pondering the possibility of an additional deposit rate cut. The downtrend in the German 10-yr remains in place so far. Regarding Fed policy, markets are now largely discounting a Fed rate cut by December. The US 10-yr yield earlier this month temporary returned above the lower bound of the previous 2.5%-2.79%. However, the cycle low (2.34% is again on the radar).
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