ECB and Fed governors wildcard for trading

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Bond rally aborted, as equities find their composure

Global core bonds continued to profit from risk aversion during yesterday's European session. A Reuters report said that Trump's campaign had 18 contacts with the Russians and might have been the driver. Sources also said that these contacts didn't contain a smoking gun though (unlawful behaviour). The trading context turned bond negative in the US session and, helped by very strong US initial claims and a Philly Fed manufacturing survey. There was some bottom fishing in the equity markets too. Core bonds slid lower during the remainder of the day as equities grinded modestly higher. The US curve flattened on higher rate hike expectations with yield changes ranging between +3.6 bps (2-yr) and -2 bps (30-yr). German bonds had still some catching up to do. Yields fell between 1 bp and 3 bps, flattening the curve. On intra-EMU bond markets, 10-yr yield spread changes versus Germany widened by 2 to 4 bps, with Greece underperforming (+11bps). Conclusion of the day: markets await further developments and are not ready to front-run on future political developments.

ECB and Fed governors wildcard for trading

The eco calendar is paper-thin to end the trading week with only EMU consumer sentiment. A slight further improvement is expected. As market turmoil cannot yet be included in the survey results, we side with consensus. More important might be speeches by ECB Praet and Constancio and Fed governors Bullard and Williams. However, in times of market turmoil, central bankers normally avoid themes like the exit policy (ECB) or rate hikes/balance sheet tapering (Fed). Nevertheless Cleveland Fed Mester yesterday said that financial market volatility has not affected her economic outlook so far. The Fed should look through the current market turmoil. She stands with her rate projections that include a June hike and a start of the tapering. We agree that the June hike is a done thing unless a big event happens, but what about the Fed's next steps? These could be affected if political upheaval still increases and affects the economic outlook. We listen closely to especially Fed Williams, whose policy stance is often close to Yellen's. Especially on the balance tapering, he might be influential.

While Praet and Constancio are heavyweights inside the ECB, it looks like the debate about the direction of policy is still open and will take place at the June meeting. ECB Vasiliauskas said the ECB should use the June meeting to start building the case for an unwinding of stimulus before making an announcement in September. Once more, we agree with the Lithuanian central banker.

Cautiousness remains warranted, but 2.16% should hold

Overnight, trading calmed as WS managed to recover a small part of Wednesday's losses. There are no new breaks in the investigation into Trump's campaign's ties with Russia. Main Asian bourses gain around 0.2%. The US Note future steadies, suggesting a neutral opening for the Bund. Greek parliament approved additional reform measures, necessary to unlock the next aid tranche and positive for Greek bonds in a daily perspective.

Today's eco calendar contains only EMU consumer confidence which won't impact trading. ECB and Fed speakers are wildcards as we look for clues going into a potentially key June policy meetings. A rift between ECB members is opening up on whether or not the central bank should give markets a heads up on the sensitive issue of its exit policy. US central bankers could give the go ahead for a June rate hike despite recent market turmoil (eg Mester, see above).

Given this thin eco calendar, risk sentiment will remain key for trading. Ahead of the weekend, cautiousness could be warranted (positive core bonds) with investors waiting on new developments in the Trump affaire. The US stock market correction has further to go from a technical point of view (S&P: 2325). The US Note future tested the contract high (126-20) yesterday (2.16% support for US 10-yr yield), but a break higher didn't occur. Once the dust settles, we would use those levels to enter new short position, given that we're on the brink of another Fed rate hike (June 14).

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