Global core bonds gained ground in Friday’s uneventful trading session. Disappointing national EMU production data (Italy, France) and lower, but in line with consensus, US CPI data had no direct impact. The rebound of oil and stock markets grinded to a standstill. US Treasuries outperformed German Bunds with investors cautious for US President Trump’s reaction function with regard to the partial government shutdown. Will he at one stage decide to bypass US Congress to get border funding? US yields shed 2.9 bps (30-yr) to 4.1 bps (10-yr) in a daily perspective. Changes on the German curve varied between -1.6 bps (10-yr) and +0.5 bps (2-yr). 10-yr yield spreads changes vs Germany ended close to unchanged with a small Italian outperformance (-2 bps) after their first, successful, bond sales of the year.
Asian markets lose ground overnight with China underperforming following disappointing trade data. Japanese markets are closed for “Coming-of-age Day”. The Japanese yen and US Note future eke out gains, suggesting risk aversion at the start of the new trading week.
The eco calendar is decapitated by the US shutdown, leaving outdated EMU production data as the sole release. National data suggest a dismal performance in November, as suggested by consensus (-1.5% M/M). Citigroup exceptionally kicks off US banks’ Q4 earnings (normally JP Morgan). In absence of other drivers, it will be key for risk sentiment and global markets. The US S&P 500 bumped into 2600 resistance for three sessions running. Earnings’ strength might decide on a possible break. European investors might prefer to stay side-lined ahead of tomorrow’s scheduled brexit vote, even if spill-over effects remained rather limited up until now. Fed speakers, US business surveys and more earnings will set the tone in the next days. We start the week with a cautious upward bias for core bonds.
Technically, the German 10-yr yield bounced off 0.15% support, but the picture didn’t change yet. Therefore, the 10-yr yield needs to clear the 0.31% hurdle. The US 10-yr yield lost the 2.75%-2.8% area by the end of last year. This zone now works as resistance in a trading band floored by 2.5%. In both Germany and the US, we think that sufficient bad news is discounted at current levels. Policy normalization expectations in the US and EMU have become extremely/too dovish. However, a clear trigger is needed before declaring a sustained turnaround.
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