Trade optimisms improves risk sentiment

KBC Market Research Desk KBC Bank

"Big day of negotiations with China. They want to make a deal, but do I? I meet with the Vice Premier tomorrow at The White House." Another tweet by US President Trump which proved to have more market moving potential than ordinary eco data. His message sent US stock markets 0.6% higher and accelerated the sell-off on core bond markets. It was soon followed by a joint statement between UK PM Johnson and Irish PM Varadkar who "see a pathway to a possible deal in coming weeks." Core bonds already faced some selling pressure ahead of these events with a technical acceleration after the Bund fell through the 173.31 neckline of a small double top formation. US CPI inflation (slightly below forecasts), ECB Minutes (highlighted split within ECB) and a decent 30-yr US bond auction were overshadowed by geopolitical events. US yields added 7.8 bps to 8.5 bps on a daily basis with the belly of the curve underperforming the wings. The German yield curve steepened with yields 4.3 bps (2-yr) to 7.9 bps (10-yr) higher. 10-yr yield spread changes vs Germany ended unchanged with Greece (-5 bps) outperforming.

Asian stock markets profit as well this morning, rising up to 1% with Hong Kong outperforming (+2.5%) as protesters debate halting vandalism ahead of the weekend. US President Trump added that high-level trade talks were going very well. The German Bund and US Note future hover near yesterday's sell-off lows as does the Japanese yen.

Today's eco calendar contains US import/export prices and October Michigan consumer confidence. The latter might be negatively affected by the GM strike. However, everything will be about the (outcome of) the Trump-Liu He meeting. Investors shifted their guarded approach into an optimistic one which could weigh further on core bonds, within established technical ranges. Speeches by Fed governors are wildcards. Dovish Fed member Kashkari dropped his dovish 50 bps rate cut call and now thinks a 25 bps cut will do. Are we nearing the end of the Fed's mid-cycle adjustments?

Technically, the German 10-yr yield and US 10-yr yield both rebounded away from August lows following ECB/Fed September policy meetings. Both fell short of really testing first resistance levels, respectively at -0.41% and 1.94% as disappointing eco data ended the run. Bullish risk sentiment now causes a return to the upper bounds. Going forward, we expect range trading with August lows protecting the downside (German 10y: -0.73%; US 10y: 1.43%).

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KBC Market Research Desk

KBC Bank

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