Risk sentiment improves; waiting for payrolls

KBC Market Research Desk KBC Bank

This week's rollercoaster ride on core bond markets continued yesterday with the Bund and US Note future both registering losses following Tuesday's impressive gains. An improvement in risk sentiment, a sell-off in the UK Gilt market, higher oil prices and US eco data weighed on bonds. The improvement in sentiment occurred as several media reports contradicted Trump's hawkish rhetoric to pull a US-Sino trade deal over the November 2020 US presidential elections. Sources even suggest additional progress made on reversing some tariff measures for a phase 1 deal. UK Gilts sold-off while sterling rallied as investors line up for a conservative election victory. Brent crude prices rose from $61 to $63/barrel with markets anticipating an extension of OPEC production cuts (currently expected to last until March). US eco data had the final say. An attempt to gain on a disappointing ADP-report was immediately blocked. The non-manufacturing ISM dropped slightly more than forecast, but details like new (export) order and employment improved. Investors especially eyed these positive elements, adding to selling pressure on core bonds. US Treasuries underperformed German Bunds. The US yield curve bear steepened with yields 3.5 bps (2-yr) to 6.3 bps (10-yr) higher. The German yield curve moved in similar fashion, with yields gaining 0.8 bps (2-yr) to 4.1 bps (30-yr). 10-yr yield spreads vs Germany ended close to unchanged with Greece (-5 bps) and Italy (-3 bps) outperforming.

Most Asian stock markets trade positive this morning with India and South Korea underperforming. JGB's don't outperform following the announcement of the government's slightly larger than expected fiscal stimulus programme. The Bund and US Note future trade directionless. Today's eco calendar is thin with US weekly jobless claims filling the void between yesterday's ADP & nonmanufacturing ISM and tomorrow's payrolls. The OPEC meeting in Vienna is worth watching with markets anticipating an extension of production cuts. Overall risk sentiment will probably drive today's action and suggests a minor downward intraday bias for core bonds. Investors will be reluctant to place large directional bets ahead of tomorrow's payrolls.

Technically, the German 10-yr yield broke above -0.41% resistance as geopolitical uncertainty diminished and capped intermediate resistance at -0.328%, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the upper half of the 1.43%-1.94% sideways trading channel. First tests to take out 1.94% failed. Trade rhetoric broke recent upward momentum in core bond yields.

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KBC Market Research Desk

KBC Bank

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