KBC Market Research Desk
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Global core bonds weren’t really going anywhere yesterday until UK Gilts showed the way lower. An EU official with access to information about Brexit negotiations said the Irish border issue was close to being resolved. EU chief negotiator Barnier later added that agreement before the EU Summit (Thursday/Friday) was “very difficult, but still possible”. Investors welcomed the headline, pushing European and US stock markets to >1% gains. Sterling obviously rallied on FX markets while core bonds thus declined. Fresh downgrades to the global growth outlook by the IMF didn’t alter the picture. The German yield curve bear steepened with yields rising by 1.5 bps (2-yr) to 4.2 bps (30-yr). The German 5-yr yield pierced through -0.69% resistance, painting a double bottom on the charts. Targets are -0.57% and -0.42%. The German 10-yr yield tested a similar resistance level (-0.41%) for the first time with the 30-yr yield nearing the key 0.14%/0.18% area. US yields added 2.5 bps (2-yr) to 4.3 bps (5-yr) on a daily basis. 10-yr yield spread changes vs Germany narrowed by 2 bps with Ireland (-5 bps) and Greece (-7 bps) outperforming.
Asian stock markets had some catching up to do this morning, but risk sentiment turned slightly less optimistic. China underperforms, even dipping in the red. The US House passed several legislation taking a hard line against China (related to Hong Kong & Huawei’s CFO). China condemned the bills, officially (through the Ministry of Foreign Affairs) threatening with retaliation if they pass US Congress. Core bonds undo part of yesterday’s losses.
US September retail sales feature on today’s agenda. The indicator has market moving potential as it offers insight on developments in the stronghold of US economic growth: consumption. Hints of weakness might be taken as a sign that weakness in the globally oriented production sector infected the domestic services sector. Risks for the headline outcome (0.3% M/M) are tilted to the downside, but the core measure should be able to keep up with consensus. (0.3% M/M). General risk sentiment will set the tone for trading though with positive and negative headlines on trade and Brexit alternating at the speed of light. Q3 earnings season and central bank speeches remain wildcards.
Technically, the German 10-yr yield and US 10-yr yield both rebounded away from August lows following ECB/Fed September policy meetings. Risk sentiment and eco data drove action within sideways ranges since. The German 10-yr yield is testing -0.41% as Brexit deal hopes surge. The outcome remains a coin toss.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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