US stock markets take double hit
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Risk sentiment on stock markets remains the dominant driver for other markets, especially in absence of any other eco or event news. A clear blue sky paved the way for additional equity gains, both in Europe and at the start of US dealings. Core bonds ceded ground via the traditional risk paradigm. US Secretary of State Pompeo's warning against China that claims to offshore resources across most of the South China Sea are completely unlawful sent a first shiver through US stock markets. The rosy picture was later completely shattered by California governor Newsom's decision to roll back the state's reopening and calling an immediate stop to indoor activities. Main US indices closed flat (Dow) to 2% lower (Nasdaq). The main move occurred after the official European close, explaining the significant intraday outperformance of US Treasuries when looking at the daily scorecards. The US yield curve bull flattened with yields declining by 0.2 bps (2-yr) to 2.9 bps (30-yr). The German yield curve bear steepened with yields rising by 3 bps (2-yr) to 5.3 bps (30-yr). Apart from risk sentiment, technical factors remained at play with the German 10-yr yield last Friday bouncing off -0.48% support. Peripheral yield spreads vs Germany narrowed by up to 4 bps.
Most Asian stock markets trade with losses this morning. China underperforms (-2%). The German Bund made a catch-up move in after-hour dealings, but is just like the US Note future off best levels. Today's eco calendar contains US NFIB Small Business Optimism, US CPI inflation and German ZEW investor sentiment. We don't expect them to be detrimental for trading ahead of bigger (US) numbers and (EMU) events later this week. US eco data include July business surveys (Empire manufacturing, Philadelphia Fed) and June hard data (industrial production and retail sales). European focus turns to the ECB meeting and EU Summit at the end of the week. The ECB is unlikely to alter its policy stance again, but will continue to strike a cautious tone on the economic recovery while standing ready to add stimulus if needed to counter downside risks. European leaders will try to broker a deal on the recovery fund with the "frugal four" still objecting the proposed structure (too large amount of grants). Risk sentiment will thus remain the needle in the market compass with yesterday's developments short term supportive for core bonds.
Technically, the US 10-yr yield is drifting to the lower end of the 0.54%-0.78% sideways trading range. The Fed's implicit yield curve control remains at work (open-ended, unlimited QE). The German 10-yr yield bounced off first support just above -0.50%.
Author
KBC Market Research Desk
KBC Bank
