Empty calendar, traders to eye ECB speakers tomorrow

Rates

US political risk triggers flight to quality

US assets got whacked yesterday. Global core bonds profited fully from safe haven flows, as did gold, the yen and to a lesser extent the Swiss franc. Equities and other riskier assets hit the skids and registered heavy losses. US political risk took the upper hand amid empty eco calendars in EMU and the US. Media reported that President Trump asked former FBI-director Comey to back off the investigation into former National Security Adviser Flynn after the latter resigned. Late yesterday, a special prosecutor was appointed to run the FBI probe into Russian meddling in the US elections. A trip down memory lane with Nixon’s resignation after Watergate and the failed impeachment procedure against Clinton. In both cases, a special prosecutor was assigned who played an important role in the process. It shouldn’t go by definition the same way in Trump’s case, but Democrat/Republican resistance against Trump might increase further, possibly compromising his ambitious reform agenda.

In a daily perspective, the US yield curve fell 5.2 bps (2-yr) to 10.1 bps (5-yr) lower. The German yield curve bull flattened with yields 2.6 bps (2-yr) to 5.8 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany were nearly unchanged with Portugal and Italy outperforming (-3 bps) and Greece underperforming (+5 bps)..

Empty calendar, traders to eye ECB speakers tomorrow

US Initial claims are expected slightly higher, but we are more interesting in the Philly Fed business outlook for May. Consensus expects a slight decline of the headline index to 18.5 from 22 in April, which would be the third monthly decline, albeit after an unsustainable spike to an all-time record in February (43.8). If confirmed, it would leave the index still well above the 30-yr average (7). However, as earlier reported, the NY manufacturing confidence dropped in May unexpectedly below zero. A bigger decline of the Philly Fed (than expected) would increase fears that the US economic growth may be worse than generally expected. A negative surprise might have more impact than a positive one. In EMU, the Minutes of the April ECB meeting will be published and 4 ECB governors speak, including president Draghi, executive board members Lautenschlaeger, Mersch and Weidmann. Together with Praet and Constancio (tomorrow), they are the last ones scheduled before the next ECB meeting. We suggested they might use the occasion to massage the markets in a certain direction ahead of the key June ECB meeting. However, we are less sure now after yesterday’s market turmoil and given the subjects of their speeches. Nevertheless, vigilance remains required. Fed Mester, a hawk who projected 4 rate hikes for 2017, speaks as well.

Spain and France tap market

The French treasury sells the on the run 3-yr OAT (0% Feb2020) and 5-yr OAT (0% May2022) for a combined €6.5-7.5B. The bonds on offer cheapened slightly in ASW spread terms going into the auction and sit rather cheap on the French curve. We expect good demand. Additionally, the French Treasury will try to raise €1.5-2B via inflation-linked bonds. The Spanish debt agency taps the on the run 3-yr Bono (1.15% Jul2020), on the run 10-yr Obligacion (1.5% Apr2027) and two off the run Obligacions (4.8% Jan2024 & 5.9% Jul2026) for a total amount of €4-5B. The Jul2020 and Apr2027 bonds are somewhat expensive on the Spanish curve, while the Jul2026 bonds is attractive. We expect plain vanilla demand.

Risk sentiment remains key; positive for core bonds?

Overnight, trading calmed after yesterday’s slaughter on US equity markets (-2%). Main Asian indices lose around 0.5% with Japan underperforming (-1.5%) on the back of yen strength. The US Note future trades with a small downward bias, while gold prices level near yesterday evening’s highs. We expect a neutral opening for the Bund, but don’t take the market calm for granted.

Today’s eco calendar contains only US weekly jobless claims and Philly Fed Business Outlook which probably won’t impact trading. ECB speakers are wildcards, but topics of most of their speeches suggests that they won’t touch upon monetary policy. Nevertheless, we look for clues going into a potentially key June meeting.

Risk sentiment will be key for trading with markets watching the latest developments in the Trump affaire. The US stock market correction probably has further to go. Risk aversion could support core bonds short term, in absence of other trading factors. The US Note future broke above 125-26+ resistance, suggesting return action to the contract high (126-20). In yield terms, 2.16% is key support for the 10-yr yield. Given that we’re on the brink of another Fed rate hike (June 14), such rally of bonds could be interesting to set up new short positions.

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