Core bonds gained ground yesterday with risk aversion mainly dominating at the start of European dealings. Key European stock indices eventually lost less than 0.5%, closing well off the intraday lows. US indices even managed to turn opening loss into marginal closing gains. Core bonds nevertheless thrived, with some short covering probably at play. Technical elements had their impact as well. The US 10-yr yield on three occasions failed to take out 1.94% resistance, prompting some investors to throw the towel, at least short term. Somewhat better September EMU production figures and higher than expected US (headline) inflation failed to impact dealings. Fed Chair Powell’s testimony for US Congress, copy-paste from the last Fed statement, couldn’t trigger reaction neither. The US and German yield curves bull flattened in a daily perspective. German yields shed 0.3 bps (2-yr) to 5.5 bps (30-yr). US yields declined by 2.4 bps (2-yr) to 5.1 bps (30-yr). Peripheral yield spreads vs Germany widened by 8 bps for Italy and by 6 bps for Greece, Spain and Portugal.

Asian stock markets trade mixed this morning. Japan underperforms (-1%) and China outperforms. The overall tone of Asian eco data (Australian, Chinese & Japanese; see headlines) is downbeat. Hong Kong protests continue to weigh on the regional market. The WSJ reports that US-Chinese trade talks hit a snag over farm purchases, but that was later denied by US Trade Representative Navarro. He advised everybody to stop listening to rumours and that they are on “a glide path to a phase one agreement”. US President Trump added that talks are moving along very rapidly without reiterating his recent threat to lift barriers if the deal collapses. Core bonds hold yesterday’s corrective upward momentum.

Today’s eco calendar contains US weekly jobless claims, PPI data and EMU GDP data. Risks for the latter are on the upside after this morning’s upward surprise from Germany (0.1% Q/Q; avoiding technical recession). Speeches by ECB and Fed governors are wildcards, but it’s common talk that the ECB’s hands are tied for some months while the Fed is again in wait-and-see mode after three mid cycle rate cuts. Risk sentiment (stock markets prone for correction) and technical factors (German 10y and US 10y yield ran into resistance) might be key and support core bonds short term.Technically, the German 10-yr yield and US 10-yr yield both rebounded away from August lows following ECB/Fed September policy meetings. The German 10-yr yield broke above -0.41% resistance as geopolitical uncertainty diminished, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the 1.43%-1.94% sideways trading channel. Recent tests to take out 1.94% failed, causing corrective return action lower.

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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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