ECB Coeure delivers the only scheduled central speech

KBC Market Research Desk KBC Bank

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Some consolidation ahead of the weekend?

Global core bonds traded near Wednesday’s sell-off lows during European dealings amid an empty eco calendar. Investors counted down to huge batch of US eco data. Inflation (PPI) once more beat expectations, but was offset by mixed business sentiment indicators and disappointing hard data (production). While this combination was no hurdle for a huge bond sell-off on Wednesday, it was the case yesterday. A lackluster attempt to head to the lows was countered by some short term profit taking. However, the move didn’t last. Core bonds topped off once US stock markets continued their 5-day comeback.

The US yield curve bear flattened with yields 2.1 bps (2-yr) to 0.2 bps (30-yr) higher. The German yield curve shifted in similar fashion with yields 0.8 bps (2-yr) to 0.1 bp (30-yr) higher. 10-yr yield spread changes versus Germany ended virtually unchanged with Greece (-6 bps) outperforming.

The US Note future trades stable overnight with most Asian markets closed for Lunar NY. Brent crude gives no indication for the start in Europe neither so we expect a neutral opening for the Bund.

Today’s eco calendar contains US housing starts, building permits and Michigan consumer confidence. These second tier eco data probably won’t move markets. ECB Coeure delivers the only scheduled central speech. He is in favour of ending the APP by September 2018. Overall, we expect trading to be sentiment-driven and technically in nature today. Underlying sentiment on core bond markets remain bearish. US yields are near cycle highs and might be attracted by key resistance levels (eg US 10-yr yield 3.05%; 2014 high). Oil and stock markets are regaining momentum and are additional negative factors for core bonds. We’d argue in favour of some short term consolidation though with chances of some profit taking ahead of the weekend. Both the Bund and the US Note future are entering oversold conditions.

Strong growth momentum, rising inflation (expectations) and the global turn towards monetary policy normalization are structurally negative factors for core bonds medium term. US and German yields cleared resistance levels earlier this year and moved towards next targets. The trading band for the US 10-yr yield is 2.64%-3.05%. The German 10-yr yield’s trading band is 0.62%-1.06%. Correction towards the lower bounds could be used to put up short positions in the Bund and the US Note future.

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KBC Market Research Desk

KBC Bank

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