Trump campaign officials requesting Russia-related documents

KBC Market Research Desk KBC Bank

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Risk rebound on stock markets

Global core bonds lost ground yesterday during Asian trading and in the first half of European dealings as risk sentiment improved. Following a 7-day sell-off and a test of key support in eg the German Dax, stocks found their composure and rebounded. The German Bund started outperforming the US Note future at the start of the US session, erasing most of the intraday losses. US eco data printed mixed, but once again failed to move markets. Expected progress on US tax reforms weighted on US Treasuries, especially at the long end of the curve.

At the end of the session, the US yield curve bear steepened with yields 2.5 bps (2-yr) to 6.2 bps (30-yr) higher. The US 2-yr yield moved above 1.7% for the first time since 2008 as investors slowly start embracing next year's FOMC forecast of three additional hikes (after the December one) on more and more hawkish Fed comments. German yield changes ranged between flat (10-yr) and +0.7 bps (2-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed up to 2 bps with Greece (+10 bps) underperforming.

Thin eco calendar

The eco calendar is thin today with only US Housing starts (1190k; 5.6% M/M) and building permits (1250k; 2% M/M), which are generally speaking no market movers. Consensus expects a rebound in October data. Housing figures recently showed signs of peaking with a potential downtrend so it will be interesting to see whether the rebound actually occurred. ECB President Draghi and Bundesbank president Weidmann both speak at the European Banking Congress in Frankfurt. The topic of debate "Europe into a new era – How to seize the opportunities?" suggests that they won't touch on monetary policy.

Cautiousness ahead of the weekend?

The risk rebound on Asian stock markets is slowly extended this morning with China underperforming. US assets (dollar, Treasuries) react on reports that special counsel Mueller subpoenaed Trump campaign officials requesting Russia-related documents. The reports outweigh progress in the US House and US Senate on (two separate) tax reform bills. We expect a neutral opening for the Bund which shouldn't be impacted by the Mueller headlines.

Today's eco calendar is uneventful. US Treasuries might outperform Bunds ahead of the weekend as US political risk showed another dimension even if we doubt the topic's bearing power. Progress on the tax reforms will probably take the upper hand again next week. Risk sentiment will continue to play a key role. The proof of yesterday's risk rebound is in today's eating. We remain suspicious about the sustainability of the move (bull trap?) and have an upward bias for bond trading going into the weekend. Central bank speakers and developments on the oil market are wildcards.

Technically, US Treasuries will probably trade in the 124-06 to 125-25 range going forward. This corresponds with a 2.3%-2.47% band in yield terms. The US curve flattening continues with investors putting themselves slowly in line with FOMC projections. The trading range for the Bund going forward is between 160.24 and 163.43. Any moves towards the topsides of the ranges could be used to put up short positions.

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KBC Market Research Desk

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