KBC Market Research Desk
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Global core bonds were mixed yesterday. The fragile risk sentiment of late tilted to the downside again with global equity markets alternating between gains and losses despite US-Sino trade tensions easing further. Growth concerns arose again as ECB president Draghi said economic risks were moving to the downside. A looming US government shutdown over funding for a wall on the Mexican border weighed on sentiment as well. Both the US and German yield curve steepened with changes on the US yield curve varying from -1.4 bps (5-yr) to +2.0 bps (30-yr). Changes on the German yield curve range from -1.9 bps (5- yr) to +3.3 bps (30-yr).
Investor sentiment deteriorated further on Asian markets this morning as data in both China and Japan disappointed. The Bank of Japan's Tankan main confidence index printed steady from the previous quarter but the forward looking number dipped to 15. Chinese economic data slowed again. Industrial production growth (Y/Y) decreased in November to 5.4%, down from 5.9% in October. Retail sales (Y/Y) dipped to 8.1%, down from 8.6% the month before and the weakest reading since 2003. Both Chinese and Japanese equities fell as the weaker than expected data fed investor worries of a global slowdown. Safe haven flows pushed core bonds higher overnight.
On today's eco calendar are the Retail Sales for November in the US. Markets expect a drop for the headline reading to 0.1% M/M, down from 0.8% M/M a month before, but that can be explained by the immense fall in oil prices of late. With energy and car prices left out of the equation, retail sales are expected to increase to 0.4%, up from 0.3% in October, a decent result. The EMU eco calendar contains the Markit PMI's for Germany, France and the aggregate number for the EMU. Consensus expects a small increase to stabilization for the EMU Composite PMI from 52.7 in November to 52.8. We don't see any reasons to deviate from this. ECB VP de Guindos speaks today, but any changes to Draghi's view/tone of yesterday are not expected. Risk sentiment will continue to set the tone for trading in general with volumes expected to slow going into next week's main event, the Fed meeting.
From a technical point of view, the German 10-yr yield tested the previous 0.28% support level yesterday. A break higher would suggest that the recent downward momentum is gone. The US 10-yr yield remains at ease above the 2.78/2.8% support level.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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