US technical breaks confirmed in weekly close?!

Next KBC Sunrise will be published on Tuesday the 22nd of May 2018.

Tensions on core bond markets eased yesterday following a hectic trading week. 5SM and Lega officials confirmed ahead the opening bell that a debt write-off and/or leaving the euro are not part the government’s plans. It’s sufficient to stop the rod on the BTP market for now, but not enough to put the genie back in the bottle. The US Note future stabilized the sell-off lows with the US 10-yr and 30-yr yields above the key levels, respectively at 3.07% and 3.22%.. US eco data remain very strong with jobless claims hovering near historically low levels and the Philly Fed Business Outlook confirming that US Q2 GDP growth will be strong after a blip in Q1. The US yield curve steepened with yield changes ranging between -2 bps (2-yr) and +2.9 bps (30-yr). The German yield curve bear steepened with yields 1.2 bps (2-yr) to 4.7 bps (30-yr) higher (mainly opening effect). 10-yr yield spreads vs Germany narrowed by 4 bps (Italy/Portugal/Spain) with Greece underperforming (+4 bps).

Asian risk sentiment is mixed overnight with China and Japan outperforming. Geopolitical news on North Korea, NAFTA and Chinese trade talks has a rather negative tone. The US Note future trades a tad higher and Brent crude somewhat lower. We expect a neutral opening for the Bund.

Today’s eco calendar only contains second tier EMU eco data and won’t influence trading. Fed governors Mester (hawk), Kaplan (modest hawk) and Brainard (neutral) are scheduled to speak, but most won’t touch on monetary policy. Trading will therefore be predominantly technically and sentiment-driven. We expect consolidation with the US 10-yr and 30-yr yields managing to confirm the break above respectively 3.07% and 3.22%. It suggests more upward potential in the medium term with next key resistance in the 10-yr yield only around 3.75%-3.8%. Strong 2018 growth expectations and the Fed stepping up its tightening cycle warrant a further increase in US yields.

Most European markets already recovered from the mini Italian political crisis yesterday. It’s probably too early to call victory yet for BTP’s. German yields turned north again though with the 10-yr closed to a test of intermediate resistance at 0.66%. We expect the EMU economy to gain traction again after a disappointing Q1 while the ECB’s normalization process will gain tack during coming months. Both warrant a further increase in German yields as well.

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