Equity sell-off eases, but sentiment remains fragile

Global core bonds gained ground on Friday as risk sentiment soured again. Signs of a further slowdown of the Chinese economy and disappointing EMU PMI's strengthened the fear of a global slowdown, pushing equity markets down. Ongoing progress in the US-Sino trade talks and better than expected US retail sales could not turn the tide. US equity markets even underperformed with losses in the order to 2%. Safe haven flows lifted core bonds. Both the US and German yield curve edged lower on Friday, with the former declining by -2.3 bps (10-yr) to -2.9 bps (2-yr). German yield curve changes varied between -0.7 bps (30-yr) and -3.2 bps (5-yr).

The equity sell-off of Friday eases on Asian markets as most equity indices color green this morning with China fluctuating between gains or losses. Nonetheless, risk sentiment remains very fragile. Both the German Bund and US Note future tread water. European equity futures hint a positive opening for European trading, putting Friday's core bond gains at stake.

Today's eco calendar appears very meagre with in the US the Empire Manufacturing gauge for December and the NAHB Housing Market Index. Housing data have most market moving potential. The past month's data point to a cooling of the housing market and add to markets' worries about a nearby end to the economic cycle. Markets expect a stabilization in the NAHB index following last month's steep drop. A downward surprise won't go unnoticed and could benefit US Treasuries. Traded volumes might be lower though with investors eying Wednesday's final Fed meeting. The Fed will most probably raise its policy rate for the fourth time this year, but investors will eye the Fed's so-called ‘dot plot'. The plot, that shows the Fed member's expectations for growth, inflation and interest rates. The median 2019 rate forecasts indicated three rate hikes. As fears of a global growth slowdown are growing, market expectations fell to only one rate hike for next year. It remains to be seen if the Fed will shift lower as well. We don't expect dramatic downgrades in the growth- and inflation assessment, suggesting the 2019 median forecast (3 interest rate hikes) will remain unchanged. However, risks are clearly tilted to the dovish side (ie 2 hikes).

From a technical point of view, the German 10-yr yield tested the previous 0.28% support level last week. A break higher would suggest that the recent downward momentum is gone, but it bounced back on Friday. The US 10-yr yield remains at ease above the 2.78/2.8% support level.

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