ECB remains wait and see mode

Rates

Global core bonds gained ground yesterday with German Bunds outperforming US Treasuries in a marginally risk-on global environment. The Bund rallied ahead from the European bell and immediately received a push in the back from disappointing (national) EMU PMI's. The bid didn't left going into the ECB meeting. The central bank kept policy unchanged, but downgraded risks to the eco outlook. They remain in wait and see mode. For an extended review. Markets very temporarily changed course when Draghi said that any new TLTRO's should be based on a monetary policy case rather than country- or sector specific reasons. US weekly jobless claims reached their lowest level since 1969, but didn't affect trading. Oil prices nudge higher against the background of the Venezuelan crisis. The German yield curve bull flattened in a daily perspective with yields 0.3 bps (2-yr) to 4.9 bps (30-yr) lower. US yields dropped 2 bps (2-yr) to 2.8 bps (30-yr) across the curve. Peripheral yield spreads vs Germany narrowed up to 5 bps (Italy).

Asian stock markets gain over 1% this morning, pulling core bonds lower. China is rumoured to send 3 vice-ministers to US-Sino trade talks early next week, lifting hopes on progress at the high-level meeting later next week. The PBOC also introduced a new swap facility to boost liquidity. The US Senate as expected rejected two rival spending bills to reopen the US government. Despite the long-lasting shutdown, US economic adviser Kudlow expects a stellar January payrolls report. We expect positive risk sentiment to transfer to Europe at the onset of dealings.

Today's eco calendar is in the US once again beheaded by the shutdown. Durable goods orders and new home sales won't be released. The EMU calendar only contains German IFO business sentiment with risks tilted to the downside following yesterday's weak German manufacturing PMI. We don't expect follow-through price action on yesterday's ECB meeting. The key message is that the ECB will be assessing incoming data which might have ramifications at the March policy meeting. Risk sentiment will probably drive intraday price-action, but we don't expect technically relevant moves. Investors will gradually shift their focus to next week's trade talks and Fed meeting and stay side-lined.

From a technical point of view, the German 10-yr yield bounced off 0.15% support, but the picture didn't change yet. Therefore, the 10-yr yield needs to clear the 0.31% hurdle. The US 10-yr yield lost the 2.75%-2.8% area by the end of last year. This zone now works as resistance in a trading band floored by 2.5%. In both Germany and the US, we think that sufficient bad news is discounted at current levels. Policy normalization expectations in the US and EMU have become extremely/too dovish. However, a clear trigger is needed before declaring a sustained turnaround.

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