US stock market sell-off triggers even more bond gains

Core bonds gained more ground yesterday as a US stock market sell-off restarted the rally in US Treasuries and to a lesser extent German Bunds. Main US equity indices lost more than 3%. The front end of the US yield curve (2yr-5yr) remains inverted. The US yield curve bull flattened with yields ending 2.6 bps (2-yr) to 8.1 bps (30-yr) lower. The German yield curve shifted in similar fashion with yields declining 1 bp (2-yr) to 6.6 bps (30-yr). Investors worry that the global growth setback and downside of fiscal stimulus will end the US's strong expansion in the near term, anticipating that the Fed will respond by turning its rate cycle somewhere around 2021. An optimistic review by NY Fed Williams didn't impress markets. He continues to expect that further gradual increases in interest rates will best foster a sustained economic expansion and sustained achievement of the Fed's dual mandate goals.

Losses on Asian stock markets are smaller this morning with main bourses losing between 0.5% and 1.5%. Chinese officials confirmed US President Trump's optimism following this weekend's bilateral meeting with Chinese President Xi Jinping. The Chinese Caixin services PMI beat consensus by a wide margin (53.8 from 50.8 vs 50.7 forecast). The Bund could still open slightly higher though in a catch-up move. US Treasury markets are closed for a day of mourning in the US in honour of ex-president Bush. Scheduled US eco data and Fed speeches (incl. testimony of Fed chair Powell) are delayed.

Today's eco calendar thus focuses on EMU, but we only get final services PMI's and (outdated) retail sales. These aren't expected to move markets. ECB Draghi, Nouy and Lautenschlaeger speak on banking supervision. Risk sentiment will probably set the tone for trading on other markets. Brent crude trades very volatile ahead of tomorrow's OPEC+ meeting which could pave the way for production cuts in 2019. The German 10-yr yield closed below 0.28% support yesterday. If confirmed, it suggests a further move south towards 0.18% (62% retracement of 2016-2018 upleg).

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