Risk sentiment remains very fragile

US markets were closed yesterday for a day of mourning in honour of ex-president Bush. European markets took a breather amid a thin EMU eco/event calendar. European equity indices opened more than 1% lower, but treaded water afterwards. German Bunds even slid into the close with the German yield curve bear flattening. Yields increased by 0.9 bps (2-yr) to 1.5 bps (30-yr). Peripheral yield spreads vs Germany narrowed by 11 bps for Italy and Greece and by 4 bps for Spain and Portugal. Italy outperformed as political leaders indicated willingness to make budgetary changes in order to avoid EU sanctions. A stronger than expected services PMI (back above 50) and more rumours about a (permanent?) TLTRO extension by the ECB were additional positives. The Fed’s Beige Book showed that most districts expanded at a modest or moderate pace. Labor markets tightened further with most districts reporting that wage growth tended to the higher side of a modest to moderate pace. These settings give the “all clear” for a December Fed rate hike.

Risk aversion returns this morning with US equity futures immediately selling off after yesterday’s day off. The Canadian arrest of Chinese Huawei CFO Meng, which came on the US’s request, sparks fears that trade talks won’t be as rosy as they seemed after the Xi-Trump bilateral in Buenos Aires this weekend. Most Asian benchmarks lose more than 1% with China underperforming. The US Note future and Japanese yen profit. We expect a stronger opening for the Bund. Italian PM Conte this morning suggested working towards a deficit of 1.9% to 2% of GDP, which can extend the BTP relief rally amid risk sentiment.

Today’s eco calendar contains US non-manufacturing ISM, ADP employment report and weekly jobless claims. Strong outcomes are expected and we side with consensus. The OPEC+ meeting in Vienna will probably deliver production cuts for next year which could floor oil prices. We doubt though whether eco data/events will play first fiddle today. Investors will probably hold a cautious approach until US investors join dealings. The overnight stock market sell-off seems exaggerated given the news flow. We don’t fight current trends however, but draw lines in the sand. For US yields, it’s 2.78%/2.8% support at the 10-yr tenor. The German 10-yr yield needs to stick above 0.18%. On the US stock market (S&P 500), we look in first instance to the October low (2603), but the real deal is the 2018 low (2530)/38% retracement on 2016-2018 rally (2508). Key support for the EuroStoxx 50 kicks in around 3068. Sustained breaks of these levels suggests reviewing our longer term scenarios.

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