Core bonds traded listless in yesterday’s European trading session, but ceded ground in US dealings as stock markets staged their umpteenth recovery. Traded volumes were thin though. Technical elements were at play for the Bund with the German 10-yr yield bouncing off -0.485% support after closing the May 26 opening gap. US eco data printed mixed with a softer than expected rebound in the June Chicago PMI and a stronger return of June consumer confidence. It’s hard to draw forward looking conclusions from the US data though as the COVID-19 virus blazes through the US and forces states to slow, pause or reverse the reopening process. The US and German yield curves both bear steepened in a daily perspective. US yields added up to 3.8 bps (30-yr) with German yields rising by 0.3 bps (2-yr) to 2.6 bps (30-yr). 10-yr yield spread changes vs Germany narrowed by up to 2 bps with Italy (-6 bps) and Greece (-7 bps) outperforming. Germany and the ECB burying the hatchet over the legality of the Public Sector Purchase Programme was marginally supportive.
Risk sentiment is mixed this morning. Japanese stocks underperform (-1.5%) on the back of a stronger yen. Core bonds lose marginal additional ground. Asian PMI’s strengthen, but Japanese Tankan sentiment slumps. US news is mixed as well from a market point of view. The US director of the National Institute of Allergy and Infectious Diseases, Fauci, warns that the US daily infections (currently around 44k) might rise to up to 100k. The US Senate voted to extend the Payroll Protection Programme until August 8. The $659bn programme is due to expire today. US Treasury Secretary Mnuchin suggested bipartisan support to extend the facility which still has some $130bn left.
Today’s eco calendar heats up in the US with June ADP employment and Manufacturing ISM. Consensus expects a catch-up move in ADP data (+2900k) with the headline ISM rebounding further from 43.1 to 49.7. We’d be guarded with the interpretation both given current developments and given that details like new (export) orders are employment will be stuck at depressed levels. Risk sentiment will continue to set the tone for trading on other markets. We continue to err on the side of caution medium term.
Technically, the US 10-yr yield is drifting to the lower end of the 0.54%-0.78% sideways trading range. Risk aversion, the rising tally of US coronacases and the Fed’s implicit yield curve control are at work (open-ended, unlimited QE). The German 10-yr yield bounced off first support just above -0.50%.
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