German ZEW sentiment and ECB bank lending survey

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Listless trading in face of empty calendar & US holiday

Yesterday, German bonds opened modestly higher as risk sentiment deteriorated in Asia on more acrimonious comments of Trump and speculation on today’s Brexit-speech by UK PM May. However, the risk off sentiment didn’t get traction in the European session. Equities opened moderately lower, but immediately moved sideways and didn’t change tack anymore. As a result the Bund returned most of the opening gains.

In a daily perspective, German yields declined (compared to Friday’s close) by 1.5 bp (10-yr) to 2.7 bps (5-yr). There were rumours that the ECB/Bundesbank bought German 5-yr bonds below the depo-rate, a possibility that became available since Friday 13 January and may explain the slight outperformance of the 5-yr. On intra-EMU bond markets, 10-yr yield spread changes versus Germany were little changed for most sovereigns with the exception of Greece (+10 bps) and Italy (+3bps). Italy’s rating downgrade by DBRS might have been behind the small underperformance of the countries’ debt, but so was a downgrade of Italy’s growth outlook. Portugal did well yesterday, despite signs that the ECB possesses about €36B of Portuguese bonds, limiting the Portuguese bond buying mainly to a part of the net newly issuance in 2017 (€14-16B). This may weigh on Portuguese bonds, but not yesterday.

 

German ZEW sentiment and ECB bank lending survey

The EMU calendar remains thin, but the German ZEW economic sentiment survey gets sometimes attention. The expectations index got hit after the Brexit-vote and only fully recovered the lost ground in December. For December, an increase to 18.4 from 13.8 is expected, a level which is historically still modest. The current situation index is expected slightly stronger than in December at a high 65. The ECB bank lending survey will be scrutinized for improvement in lending conditions and demand. In the US, the calendar contains only the NY manufacturing survey. The headline index rose substantially in December to 9 from 1.5 in November and -6.8 in October. For December a stabilization is expected (8.5). So it will probably be a strong report, but we see little scope to surprise on the upside, even as it is a volatile indicator.

 

Scheduled supply from Germany; New 10-yr OLO?

Today, the German Finanzagentur holds a 2-yr Schatz auction (€5B 0% Dec2018). In the run-up to the auction, the bond traded stable in ASW spread terms and it’s a tad cheap on the German curve. Total bids at the previous 4 Schatz auctions averaged €5.7B. We expect a plain vanilla auction. The Kingdom of Belgium announced the launch of a new 10-yr syndicated deal, OLO 81 (0.75% (?) Jun2027), which will likely take place today. Concerning the pricing of the new OLO 81 on the Belgian yield curve, we interpolate asset swap spreads between OLO 77 (1% Jun2026) and OLO 75 (1% Jun2031) as OLO 81 (0.75% (?) Jun2027) has a maturity date in between these two OLO’s. We didn’t use OLO 31 (5.5% Mar2028) because it trades outside the Belgian curve. The interpolation (based on yesterday’s closing levels) corresponds with an asset swap spread of 6 basis points, including a small new issue premium.

 

Sentiment-driven trading

Overnight, most Asian stock markets trade mixed, with many regional bourses profiting from dollar weakness, but Japanese equities suffering from yen strength. The risk assessment is modestly negative, as a weak yen and strong gold trump equity trading. US Treasuries are higher, suggesting a stronger Bund opening.

Today’s eco calendar remains thin and second tier. The general risk sentiment will be the main market driver, but technicals should be taken into account too. The current negative risk sentiment might still be influenced by the speech of May, but many details are already released. However, US traders didn’t get the chance to react to it and neither to this weekend’s acrimonious comments of Donald Trump. So, the reaction during the US trading session may prime developments this morning.
Technically, the US Note future tested 125-09 resistance several times last week, but a break didn’t occur. We think that the US Note future might remain in the sideways trading range between 122-14+ and 125-09. Thus we expect that risk off sentiment won’t be able to push the Note future beyond 125-09. In yield terms, the US 10-yr yield has support at 2.28% and 2.15% (gap), levels which should come into play if we are wrong.

Longer term, we expect US markets to further align with the Fed’s scenario of 3 rate hikes this year. In EMU, the German Bund bounced into 164.9 resistance. The short-term trading range is 162.62-164.90. As the underlying economic picture in EMU improves further, we also expect more downside in the Bund despite the ECB’s bond buying programme.

 

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