US stock markets follow their own path

KBC Market Research Desk KBC Bank

Core bonds ended mixed yesterday with US Treasuries outperforming German Bunds. The German Bund opened on a soft footing, returning from the long Easter weekend and catching up with US Treasuries losses. Sideways trading made way for core bond gains starting around the US open. EMU consumer confidence and US Richmond Fed manufacturing confidence disappointed, while new home sales unexpectedly beat consensus. Data had no direct market impact and neither did US stock markets. The Nasdaq and S&P 500 closed at record high (boosted by strong earnings), but didn't pull bonds lower via the risk on/risk off paradigm. US yields declined by 1.2 bps (30-yr) to 2.7 bps (5-yr). German yields added between 0.1 bp (2-yr) and 1.7 bps (10-yr). 10-yr yield spread changes vs Germany widened marginally with Italy (+6 bps) underperforming on reports of more government tensions and ahead of Friday's credit review by S&P. The rating agency has a negative outlook on the country's BBB rating since October. Positive/negative outlook normally gets sorted out within a 2-yr timeframe. It's probably too early to use the axe.

Asian stock markets buck Wall Street's bullish run with Japan, China and South Korea even ceding ground. Core bonds have an upward bias. The US and China will restart trade talks in Beijing next week, pushing for a draft agreement by the end of May. The overnight market reaction shows that a positive outcome in the US-Sino trade conflict is discounted.

Today's eco calendar contains the April German Ifo business confidence.
Consensus expects a stabilization of both the current climate and expectations indices after a March rebound. Risks, if any, probably remain tilted to the downside. Companies reporting earnings include industrial machinery group Caterpillar, a bellwether for the economy, scandal-hit Boeing and technology giants Microsoft and Facebook. These are wildcards for trading. Crude inventories will be closely monitored as well, following Brent crude's recent leap higher. We still prefer to err on the side of caution which argues in favour of core bonds.

Long term view: markets concluded that the ECB missed out on this cycle. They even start pondering the possibility of an additional deposit rate cut. The downtrend in the German 10-yr remains in place so far. Regarding Fed policy, markets now discount a 50% probability of a Fed rate cut by December. The US 10-yr yield closed last week above the lower bound of the previous 2.5%-2.79% trading range which turns the technical picture more neutral again.

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KBC Market Research Desk

KBC Bank

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