Countdown to ECB policy meeting

Global core bonds traded yesterday with a minor upward bias in an uneventful European session, that was defined by its thinness of trading. European stock markets were volatile, but couldn't influence the Bund's performance. EMU eco data (final CPI inflation) also failed to trigger a market reaction ahead of Thursday's ECB meeting. Many investors turn more cautious ahead of that meeting. Will Draghi downplay some of his hawkish interpreted comments in Sintra or will he confirm them? The latter could spark unwanted market volatility as an official announcement on QE tapering is only expected in September.

Core bonds painted an intraday topping off pattern during US dealings despite a weaker-than-expected US Empire Manufacturing index. A JPM report arguing in favour of a Fed balance sheet announcement at the July 26 FOMC meeting might have played a role. We only expect such an announcement at the September meeting.

At the end of the session, the German yield curve dropped up to 1.4 bps lower with the belly of the curve outperforming the wings. Changes on the US yield curve varied between flat (2-yr) and -1.8 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 4 bps (Spain/Italy).

Thin eco calendar

Today's eco calendar remeans unattractive. In the US, import prices (June) and the NAHB homebuilders' sentiment (July) won't be able to give the market firm direction, while the EMU calendar contains only the German ZEW economic sentiment survey for July. The latter is expected to have stabilized in both the current situation (88) and the expectations subcomponents (18). The ZEW is correlated rather well with the equity markets. As these are only slightly below the levels of a month ago, we have no reasons to distance us from the consensus outcome. On the event calendar are Q3 US earnings reports (see calendar), the Riksbank Minutes and the ECB bank lending survey. These are interesting, but likely of minor importance as traders eye already Thursday's ECB meeting.

Some risk aversion after Obamacare fiasco

Overnight, most Asian stock markets lose around 0.5%. US Senate Republicans abandoned their effort to dismantle Obamacare because of a lack of support which hurts risk sentiment. The dollar took a significant hit, but gains in the US Note future remain modest. We nevertheless expect a stronger opening for the Bund as well.

Today's eco calendar remains razor thin with only German ZEW and US import prices (and NAHB survey). American price indices could impact markets somewhat, given Yellen's subtle inflation warning last week. However, Friday's disappointing CPI readings left no permanent traces on bond markets and import prices are always less important than CPI. Q2 earnings reports are a wildcard and could influence markets via risk sentiment. Overall, we expect trading to remain confined to tight ranges. If any, core bonds could trade with a small upward bias. Partly because of US political risk and partly because of Thursday's ECB meeting. We don't expect the ECB t o change the wording of the statement while Draghi will have to explain his (hawkishly interpreted) Sintra comments in more detail. We think that an announcement on winding down asset purchases will only come in September, when a new inflation report is av ailable. On intra -EMU bond markets , Greece is rumoured to return to return to capital markets this week.

From a technical point of view, the T -Note remained above the key 124 - 12/01+ support area while the German Bund fell below similar support at 161.68/58 . Next support stands at 160.17 . I f broken, this could point to a full retracement towards 158.89. We hold our longer term sell -on -upticks strategy in both the Bund and US Note future as markets reposition for a new stage in the global monetary cycle: poli cy normalisation. The peak of central bank dovishness is behind us.

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