Asian stock markets lose up to 5% overnight

KBC Market Research Desk KBC Bank

Rates

US 10-yr yield tests important support

Core bonds eked out substantial gains yesterday, but it wasn't because of follow-up buying after Wednesday's evening FOMC meeting. The new upleg started in Europe following a batch of disappointing PMI's (2nd month in a row though still at lofty levels) and accelerated as stock markets heavily sold off in the run-up to US President Trump's tariff announcement against China. Main US indices closed up to 3% lower. The US yield curve bull flattened with yields 2.6 bps (2-yr) to 5.9 bps (10-yr) lower. German yields declined by 1.6 bps (2-yr) to 6.3 bps (10-yr). 10-yr yield spread changes vs Germany widened up to 2 bps with Portugal (+6 bps) and Greece (+14 bps) underperforming. S&P gives an update on the Spanish rating tonight (BBB+, pos. outlook). The limited impact of the Catalan crisis and Spain's outstanding economic performance, suggest that a one-notch upgrade is likely in line with Fitch earlier this year. Anticipation can cause some Spanish outperformance today in the peripheral spectrum.

Asian stock markets lose up to 5% overnight. Apart from the escalating trade conflict, US President Trump replaced his national security advisor by another foreign policy hawk. The US Note future slightly extends gains, while the yen profits from safe haven flows on currency markets. The US 10-yr yield tests important support around 2.8%. We expect a stronger opening for the Bund.

Today's eco calendar contains US durable goods orders and speeches by 4 Fed governors. The most interesting Fed speech is the one from Atlanta Fed Bostic, who is a voter in favour of 2-3 rate hikes in 2018. These items probably won't impact trading in light of recent events. All eyes remain on stock markets. An intensification of the sell-off could generate more safe haven flows into core bonds. The nature of the stock market root suggests though that this link might break at one stage. If China responds for example by reducing or halting US Treasury purchases, it might backfire (US Treasury sell-off instead of safe haven buying), especially with the prospect of increasing US twin deficits. We won't row against the tide yet, but keep a close eye on the link. In any case, the underperformance of the US Note future against the Bund can continue.

After the Fed meeting, we advocated corrective action in the US 10-yr yield towards 2.8%. The test is currently ungoing. We don't anticipate a break lower, but won't set-up new short positions with too much uncertainty looming ahead of and during the weekend. The German 10-yr yield fell below 0.62% support after the ECB meeting, suggesting a technical correction towards 0.46%-0.48% support (gap open/62% retracement).

Download The Full Sunrise Market Commentary

Author

KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

AUD/USD defies Iran war jitters as RBA hike bets double

The Australian Dollar rallies for the fourth straight day against the US Dollar as market mood remains positive amid high tensions in the Middle East, pointing to a resumption of hostilities, as reported by recent news. Despite this, the AUD/USD trades at 0.7027, up 0.44%.

USD/JPY remains confined in a familiar range below 158.50

USD/JPY sees some dip-buying in the Asian session on Wednesday, though it remains confined within a multi-week range near 158.50 as the uncertainty over the timing of the next BoJ rate hike keeps Japanese Yen bulls on the defensive. Meanwhile, hawkish Fed expectations, bolstered by inflation risks stemming from volatile oil prices, underpin the US Dollar. However, looming intervention fears could limit JPY losses and cap the currency pair.

Gold advances modestly; targets $4,150

Gold prices manage to reverse three consecutive daily declines, trading just below the $4,150 mark per troy ounce on Wednesday. The precious metal’s recovery comes amid a slight drop in the US Dollar, mixed US Treasury yields across the board and a widespread cautious tone from the US-Iran front.

Dogecoin Labs launches, resistance looms

Dogecoin (DOGE) Labs launched Wednesday in partnership with the Dogecoin Foundation, bringing together several product teams and technologies to expand the use of the memecoin (DOGE) across payments, decentralized finance (DeFi) and consumer applications. The launch will consolidate MyDoge, DogeOS and Such App under one business, led by Jordan Jefferson, founder of MyDoge and DogeOS.

What the midterm elections mean for Treasury yields, the Dollar and Gold

Democrats are priced to take the House, so November 3 comes down to the Senate and how much Washington can borrow without the other party. Treasury yields will show the answer first, then the Dollar and Gold. On November 3, Americans vote for all 435 House seats and 35 Senate seats. For bond prices, the result comes down to one thing: how much the government will borrow over the next two years.

The US Dollar fell. Gold didn't rally. That tells you everything

Gold (XAU/USD) is struggling to capitalize on a weaker US Dollar (USD), after repeatedly failing to establish itself above the $4,200 level. The precious metal remains confined to a relatively narrow trading range despite a combination of developments that would normally support higher prices.